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U.S. Tax Requirements

1. Capital Gains Tax on Sales
Non-resident aliens and foreign corporations are taxed on income resulting from the sale of U.S. real property. A buyer who is aware of that at the time of purchase can plan accordingly, and may even consider an exchange (investing in like kind of property). The time to divest can become the time to reinvest.

2. FIRPTA (Foreign Investment in Real Property Tax Act)
Under FIRPTA, a buyer must withhold 10% of purchase price if the seller is a foreign person. No withholding is required if the seller is a U.S. citizen; green cardholder (lawful resident); or resident alien (meets either the physical presence test—present in the U.S. for at least 183 days in the current calendar year; or the substantial presence test—present in the U.S. for a weighted average of 183 days over three years).

At the time of purchase, foreign buyers should a acquire a U.S. taxpayer identification number (TIN). Waiting until the time of sale to obtain a TIN may cause difficulty recovering money withheld pursuant to FIRPTA.

3. Income Tax (on income producing property)
Generally, non-resident aliens are taxed at a flat 30% federal tax rate on gross rental income, unless they make a certain income election on their returns. This election, which allows for deductions for regular expenses before income tax is calculated is commonly know as the “net election.” If you are interested in income properties consult your tax advisor (lawyer or accountant) and verify that the advisor knows about, and knows how to exercise, the “net election.” If you would like a referral to a good advisor, please contact the Sandon Group at (813) 319-6500.  Further, anyone who collects income for a non-resident alien and then pays that income to a client is generally required to withhold 30% of gross U.S. source income (such as rent). No withholding is required if the foreign person has a green card, meets the physical or substantial presence test, or if there is a treaty addressing this issue between the U.S. and that person’s home country.

4. Property Taxes
Property tax payments are required as an additional cost of real property ownership. These payments can be added to a loan or paid directly to the taxing agency. Failure to pay property taxes can lead to financial penalties and even loss of the property. Just as a taxing agency (usually a county) has remedies against a property owner for failure to pay property taxes, so may a lender, since the failure to pay usually is also deemed a breach of the loan agreement. It is important to know that change in ownership, such as altering title among family members and differing entities may cause the property value to be reassessed, and the property tax payments to increase.

5. Title decisions
The way a foreign buyer clients take title (individual, foreign corporation, U.S. corporation, or trust, for example) is a serious decision that could affect their ability to transfer the property and the financial and tax implications both during the property’s ownership, and upon sale. In states like California, which taxes worldwide income, the decision can affect more than the property itself. Since the method of holding title can affect the tax consequences during life and after death, it is advisable to to seek out a competent lawyer or an accountant with an international practice. Please contact the Sandon Group at 813-319-6500 if you would like a referral to a good international attorney.

U.S. Reporting Regulations for Foreign Owners
There are very few restrictions on ownership of U.S. property by foreign persons, but you should be aware of certain reporting regulations.

1. Agricultural
The Agricultural Foreign Investment Disclosure Act requires the reporting to the Farm Service Agency of the Secretary of Agriculture within 90 days of a transfer to or from a foreign person if the land has been used for agriculture, forestry, timber, farming, or ranching, within the last five years, is 10 acres or more, and generates $1,000 or more in gross receipts. Failure to make a timely report can generate hefty penalties.

2. Statistical
The Bureau of Economic Analysis of the Commerce Department requires reporting of foreign ownership of all real property for analytical and statistical purposes only. There are exceptions for a personal use primary residence (or rental if intent to return) and partial exemption from reporting for real estate which is both valued at less than $3 million and is less than 200 acres.

Rick and Lori Sandon, Trusted Mortgage Professionals