FOREIGN REAL ESTATE BUYER RULES
Tax Considerations for Foreign Individuals for US Real Estate
1. Property Tax
o The local governance charges an annual tax on the value of the property. This normally will be escrowed by the property management group and charged to you monthly and paid annually for you. The rate is about 1.6% of the value annually in Florida (our partner local office address).
2. Income Tax
o Any income in the United States must be declared and tax either withheld or paid at normal income rates (See note below)
o Each buyer must obtain an ITIN (Individual Taxpayer Identification Number) and file an annual tax return. There will be a charge for preparing tax returns. In this case income tax rates can be as low as 5% to 10% of the INCOME portion of proceeds only. Our property management group will arrange this for you through a Certified Public Accountant.
3. Capital Gains Tax
o Upon the sale of the property in the future, the profit is calculated and a capital gains tax rate must be paid. This is currently 15% of the profit (gain).
4. Sales Tax
o If you rent your condo for six months or less, you must charge the tenant 6% sales tax plus 5% tourist sales tax on top of his rent and pay the rent to the local governance. Our property management group will do this for you. ( We do not suggest these type of short term rentals.)
5. Estate Tax
o Should you die when you own this property or decide to gift it, there will be additional taxes.
Note: If you choose not to get an ITIN and not file tax returns, there is a 30% withholding on all gross rents. (For an application for an ITIN Number click here)
The above comments apply to individual ownership, not corporations or partners.
We advise you to examine and discuss the tax ramifications with your advisor.
FEDERAL GOVERNMENT REQUIREMENTS
In the United States there are very few restrictions on international real estate investors, buyers, or sellers. The only exceptions concern national security, hostile countries, purchase or control of federal lands, and purchasing a business in a sensitive category.
As an international investor (foreign national) you may take title to real estate in your own name, in the name of a domestic corporation, foreign corporation, a limited partnership, a limited liability company, a joint venture, a real estate investment trust (REIT), or a foreign pension plan.
As a foreign national investor purchasing property in the United States you may acquire, transfer, or be involved in a real estate transaction without the permission or approval from any federal, state, or local governmental entity. You just need to comply with the following three issues.
1. Visitors VISAS & Immigration Laws: Title 8 of the United States Code details all U.S. Immigration Laws. Every non-U.S. citizen who wants or needs to enter the United States must have a VISA. There are over 40 kinds of non-immigrant visas so you should consult an immigration attorney and a U.S. Embassy or Consulate to find out which type of visa is appropriate to your situation.
Most foreign nationals who want to own property or live permanently in the United States commonly use the following types of visas.
B-1 (Business Visitor): This visa allows you, as a foreign citizen, to incorporate in the United States, acquire property, sign contracts, and perform other specific business activities. However, it doesn’t permit you to directly manage a U.S. based business or receive U.S. sourced wages (income from employment).
L-1 (Intra-Company Transferee): This visa pertains to foreign individuals who own or work for a foreign corporation that is directly related to a U.S. corporation. It allows you to enter the U.S. if you are employed in an executive, managerial, or special-knowledge capacity for that corporation.
E-1 (Treaty Trader): This visa is available for foreigners from nations that have a trade treaty and commerce with the United States. It permits you, your spouse, and your minor dependants to live in the U.S. for an indefinite number of years.
E-2 (Treaty Investor): This visa allows a foreign person to live in the U.S. while actively investing in, operating, and managing a United States based business.
EB-5 (Million Dollar Investor): This visa is available for non-U.S. citizens who plan to make a capital contribution of $1 million ($1,000,000) or more to a U.S. Based enterprise.
H1-B (Temporary Professional Worker): This visa allows a foreign person with a bachelor’s (4-year college or university) degree or higher to remain in the US for up to 6 years while employed in a professional position with a United States employer.
O and P (Extraordinary): These visas are available for aliens of “extraordinary” ability in the sciences, education, business, or athletics to live and work in the United States.
Non-Immigrants (Temporary Residents) who already own real estate property in the United States can enter as short- term visitors for a vacation, to study as a full-time student, to conduct special projects, or to be temporarily employed, as well as other reasons. Some types of Visas for Non-Immigrants are B-1 & B-2 (Business Visas), E-1 & E-2 (Treaty Trader & Investor Visas), F-1 (Full-Time Student Visa), L-1 (Inter-Company Transfer Visa), Investment Visas, and the Visa Waiver Pilot Program.
2. Federal Taxation: Non-immigrants or non-residents must pay taxes on the income that they make from their investments in the United States. You are not taxed on income made outside the United States unless you overstay your visit. If you overstay your visit you can become classified as a “Tax Resident” which can result in all of your income from all sources worldwide being subject to U.S. tax. You are considered to be a U.S. resident for tax purposes if you meet the substantial presence test for the calendar year of your visit. Therefore it is essential that you keep track of the number of days spent in the United States each year.
However, there are exemptions to the specific time limits on stays for medical conditions and when you have specific connections to another country. You should consult an accountant (CPA) who specializes in these matters to find out about U.S. taxation law. Information can also be obtained from an immigration attorney or at a U.S. Embassy or Consulate.
Most probably you won’t be eligible to receive a U.S. Social Security Number (SSN), which is also a U.S. citizen’s Taxpayer Identification Number (TIN). Instead you are required to obtain an Individual Taxpayer Identification Number (ITIN). A ITIN can be issued by the Internal Revenue Service (IRS) or by a Certified Professional Accountant (CPA) approved by the IRS. You will have to fill out a Form W-7 (in English language) or a Form W-7(SP) (in Spanish language) in order to request your ITIN. On the W-7 form you will be required to give a valid reason for your application.ITIN Guidance for Foreign Property Buyers and Sellers http://www.irs.gov/individuals/article/0,,id=120219,00.html
3. Reporting and Compliance: If you have income from any source in the United States, including real estate, you are required to file a federal income tax return for the year in which your income was received. Also, some states and cities collect income tax and require a return to be filed.
The federal government also requires all foreign buyers of agricultural land to report their purchase within 45 days of closing the transaction.
Real estate agents, brokers, attorneys, and escrow (closing) agents, must report all cash transactions over $10,000 no matter the type of property or reason for the transaction. That includes binder (escrow) deposits and escrow payments. Cash transactions less than $10,000 made at near intervals that add up to more than $10,000 are considered to be one transaction. Therefore, if you pay cash for property, expect that you might be questioned about its source. IRS Form 8300 is used to report cash binders and transactions.
RATES OF WITHHOLDING
The transferee must deduct and withhold a tax equal to 10% (or other amount) of the total amount realized by the foreign person on the disposition. The amount realized is the sum of (1) The cash paid, or to be paid (principal only), (2) the fair market value of other property transferred, or to be transferred, and (3) the amount of any liability assumed by the transferee or to which the property is subject immediately before and after the transfer. The amount realized is generally the amount paid for the property. If the property transferred was owned jointly by U.S. and foreign persons, the amount realized is allocated between the transferors based on the capital contribution of each transferor.
In Florida it is illegal to pay a commission or fee to any person or company that does not have an active real estate license unless there is no licensing law in that person or company’s state or country (nation). All payments of referral fees or commissions to bona fide foreign real estate brokers (persons or companies) are subject to a 30% federal withholding tax. You should consult an accountant (CPA) for details.
There are other laws that may pertain to your particular situation so it is always important to consult with the appropriate professionals and government agency officials before entering into a contract to buy or sell real estate in the United States.
B. Transaction Requirements
1. Buying with Cash Brought into the United States: Although cash or its equivalent is almost always acceptable, there can be issues concerning the amount, its transfer into the United States, and how it was obtained.
U.S. law provides that all cash transactions over $10,000 be reported to the federal government. The requirement for reporting involves everyone connected to the transaction including real estate agents and brokers, attorneys (lawyers), title companies, closing agents, and lenders. They may want to know how you earned the money and where it comes from in order to determine that it was legally obtained.
If you finance your real estate or business purchase with a loan from a foreign lender (bank or private) it might be considered a cash transaction because the loan is closed overseas before the property closing. Then the borrowed money is transferred into the United States to be available for the property purchase closing.
Withholding of Tax on Dispositions of United States Real Property Interests
The disposition of a U.S. real property interest by a foreign person (the transferor) is subject to the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) income tax withholding. FIRPTA authorized the United States to tax foreign persons on dispositions of U.S. real property interests. A U.S. real property interest includes sales of interests in parcels of real property as well as sales of shares in certain U.S. corporations that are considered U.S. real property holding corporations. Persons purchasing U.S. real property interests (transferee) from foreign persons, certain purchasers’ agents, and settlement officers are required to withhold 10 percent of the amount realized (special rules for foreign corporations) Withholding is intended to ensure U.S. taxation of gains realized on disposition of such interests. The transferee/buyer is the withholding agent. If you are the transferee/buyer you must find out if the transferor is a foreign person. If the transferor is a foreign person and you fail to withhold, you may be held liable for the tax.
The amount that must be withheld from the disposition of a U.S. real property interest can be adjusted pursuant to a withholding certificate issued by the IRS but it is normally ten percent.
A disposition includes the sale/purchase of U.S. real estate.
Generally speaking, in reference to the sale/purchase of real estate, the person selling the real estate, the seller, is commonly referred to as the transferor.
The purchaser/buyer of the real estate is commonly referred to as the transferee.
Generally speaking the amount realized is the purchase/sales price of the real estate.
Generally speaking the buyer must find out if the seller is a foreign person. If so, the purchaser/buyer must withhold income taxes.
The purchaser/buyer may be held liable for the tax that should have been withheld on the purchase.
One of the most common exceptions to FIRPTA withholding is that the transferee (purchaser/buyer) is not required to withhold tax in a situation in which the purchaser/buyer purchases real estate for use as his home and the purchase price is not more than $300,000.
For additional information on the withholding rules that apply to corporations, trusts, estates, and REITs, refer to section 1445 of the Internal Revenue Code and the related regulations. For additional information on the withholding rules that apply to partnerships, refer to discussion under partnership withholding. Also consult IRS Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities, section U.S. Real Property Interest
2. Financing and Credit for Foreign Buyers: Foreign buyers of real estate in the United States have the option of taking out a loan to make a real estate purchase. In rising real estate markets and usual economic conditions, there are numerous lenders (banks and mortgage brokers) that will lend money to non-United States citizens to buy real estate. In times of crisis or unusual economic conditions many of these funding sources tighten up and restrict or discontinue such loans.
NOTE: At this time in 2012 financing in the United States is very tight and difficult to get. Lender programs for foreigners are hard to find. There are a few “asset lenders” and “private money lenders” who still make loans to non-U.S. citizens for property in the United States, but their interest rates are high and terms are restrictive. So you should try to obtain funding in your country with a lender who is willing to work with you. Then make arrangements to transfer and “season” the money by keeping it in a U.S. account for a specified length of time. Then you can pay cash for your real estate purchase.
It is important that you line up financing BEFORE placing an offer on property to make sure that your loan can be approved and funded before the contract period expires. Each lender will have their particular requirements, application forms, and timing for approval. Most lenders will have different loan programs to choose from depending on your qualifications, the amount to be borrowed, and the terms of the loan. Interest rates, down payments, fees, and credit standards can vary greatly among lenders so it pays to shop for the best loan.
Foreign buyers who have no established credit history in the United States won’t be known to the three credit scoring services: Equifax, Experian, and Trans-Union. Without a credit score most lenders won’t be able to process your loan, so alternative forms of credit will be needed to prove that you are a good risk. Alternative credit can be letters or statements from previous lenders or other providers of services stating that you have a history of making monthly payments on-time and paying off loan balances when due. Letters or statements can be from banks, other types of lenders, utility companies, telephone companies, cable television providers, retail stores, or any place that you bought a product or used a service in advance of paying for it.
Most United States based lenders will also want to have proof of your income and ability to make payments on the loan. Salary or wage statements from an employer for the current year, income tax returns for the previous 2 or 3 years, and proof of stock dividends or interest earnings will be requested.
Almost all banks and other lenders will require that the money (funds) you use for your down payment and closing costs be deposited in a United States bank for a specified length of time. This is known as “seasoning the money.” If your money is not deposited in the lender’s account they will ask for proof, in the form of bank statements, from the other bank where the money is located. Sometimes it takes a few weeks to get this verification of deposit. It is not unusual for a lender to require that your funds be seasoned for 2 to 3 months.
An appraisal of the property you are purchasing will be required by the lender to make sure that the real estate or business is worth more than the amount you are borrowing. The past and existing title (ownership) will also be investigated to find out if there are any liens or claims against the property. In the case of real estate purchases an up-to-date survey of the property will also required.
3. Escrow Account for Property Taxes and Insurance: If your down payment for the purchase of a home is not over 20% of the purchase price your lender will almost always require you to have an escrow account. Along with your monthly payment of principal and interest on your loan, you will pay 1/12 (one-twelfth) of the yearly (annual) cost of property taxes and homeowner’s insurance. This account will accumulate the tax and insurance payments until the end of the year when the lender will forward the full payments to the appropriate local tax collector and your insurance company.
Also, a lender may require a monthly payment of Private Mortgage Insurance (PMI) if your down payment is less than 20% of the purchase price. In case of a land purchase, no insurance will be necessary unless there is a liability risk.
If you buy a condominium, the exterior building maintenance and insurance is included in the monthly association fee. It is still wise to purchase liability insurance and personal property insurance to cover the interior and your personal possessions.