US Tax of Usufruct & Naked Ownership: FBAR & FATCA

US Tax of Usufruct & Naked Ownership: FBAR & FATCA

US Taxation of a Usufruct 

US Taxation of Usufruct & Naked Ownership: Unless you live in Louisiana, or are familiar with civil law, you may be unfamiliar with the concept of a usufruct and naked ownership. In many European countries, as well as in Louisiana, there is a form of ownership called “Usufruct.”

This type of ownership is different than the general type of asset ownership available in the U.S. It is a hybrid of estate law, trust and general ownership/borrowing concepts.

What make these types of structures even more complicated, is the reporting under IRS International Information return filing – such as FBAR & FATCA.

Naked Ownership & Usufruct

Naked ownership is the concept of owning the property like a shell – without certain rights. Generally, when someone has naked ownership of a property, they own it but they do not have full rights to the property. Rather, another person has the limited right to use and enjoy the property.

In a common situation, a client will have received a gift or inheritance of a property or business.

The business may generate income, but that income is all going to a 3rd party, aka the Usufruct.

Usufruct Example

Michael is 9 years old when his father purchases him a property in an up-and-coming area that has a tenant/owner.

Michael’s Father believes the value will shoot-up in the future, and wants to take advantage of the ownership now. Michael’s family does not need the income, so the immediate income and earnings is not important.

Therefore, they purchase naked ownership of the home.

  • The Usufruct is the tenant and owns the Usufructuary
  • Michael is the Naked Owner

Rights of the Usufruct

The Usufruct has limited rights to the property.

This is generally similar to someone with a life estate, including residing in the property and/or collecting rent.

It also resembles a QPRT to the extent that it allows someone to reside in the home (such as a parent), without giving them the right to sell the property or make an major changes to it.

U.S. Tax of a Usufruct

Generally, a Naked Owner of the property is not going to be taxed on the income.

Why?

Because the naked owner does not have any rights to the income.

It is similar to owning an asset as a secondary owner with no right to income. While it may be reportable (FBAR & FATCA), if there is no income attributed to the naked owner, then there is no tax.

As to the Usufruct, they would be taxed. Even if the Usufruct cannot sell the property, they are enjoying the income and therefore would pay tax on it.

Reporting for Naked Ownership & Usufruct

A Naked Owner would presumably have to report the asset and possibly for the Usufruct.

Why?

An income stream is not required for someone to have to report the assets, so therefore the naked owner would have a reporting requirement. In other words, assets are reportable even if there is no income attributed to it.

As to the Usufruct, since they are receiving the income, the IRS may take the position that the Usufruct is a constructive owner. Since offshore penalties for non-compliance can be very comprehensive, compliance is crucial.

Here are some common reporting examples:

FBAR (FinCEN Form 114)

Reporting Foreign Bank Accounts

FATCA Form 8938

Reporting Foreign Assets

PFIC Form 8621

Reporting Investment Funds

Form 3520

Reporting Gifts and Trust

Form 3520-A

Reporting Trust Ownership

Form 5471

Reporting Foreign Corporations

Form 8865

Reporting Foreign Partnerships

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure

We are the “go-to” firm for other Attorneys, CPAs, Enrolled Agents, Accountants, and Financial Professionals across the globe. Our attorneys have worked with thousands of clients on offshore disclosure matters, including FATCA & FBAR.

Each case is led by a Board-Certified Tax Law Specialist with 20 years of experience, and the entire matter (tax and legal) is handled by our team, in-house.

*Please beware of copycat tax and law firms misleading the public about their credentials and experience.

Less than 1% of Tax Attorneys Nationwide Are Certified Specialists

Sean M. Golding is one of less than 350 Attorneys (out of more than 200,000 practicing California Attorneys) to earn the Certified Tax Law Specialist credential. The credential is awarded to less than 1% of Attorneys.

Recent Golding & Golding Case Highlights

  • We represented a client in an 8-figure disclosure that spanned 7 countries.
  • We represented a high-net-worth client to facilitate a complex expatriation with offshore disclosure.
  • We represented an overseas family with bringing multiple businesses & personal investments into U.S. tax and offshore compliance.
  • We took over a case from a small firm that unsuccessfully submitted multiple clients to IRS Offshore Disclosure.
  • We successfully completed several recent disclosures for clients with assets ranging from $50,000 – $7,000,000+.

How to Hire Experienced Form 8938 Counsel?

Generally, experienced attorneys in this field will have the following credentials/experience:

  • 20-years experience as a practicing attorney
  • Extensive litigation, high-stakes audit and trial experience
  • Board Certified Tax Law Specialist credential
  • Master’s of Tax Law (LL.M.)
  • Dually Licensed as an EA (Enrolled Agent) or CPA

Interested in Learning More about Golding & Golding?

No matter where in the world you reside, our international tax team can get you IRS offshore compliant. 

Golding & Golding specializes in FBAR and FATCA. Contact our firm today for assistance with getting compliant.