Taxation Of Nonresident Aliens
Florida real estate has always been attractive to foreign buyers because of the state's weather, beaches, tourism, rental market and world famous theme parks - no wonder foreign investors are flocking to get their piece of the American pie. According to the National Association of Realtors, Florida has the largest number of foreign real estate investors in the U.S. The most important factor influencing a client’s decision to purchase Florida property appears to be primarily tied to the security and profitability of investing in Florida property.
Foreign nationals are able to purchase real estate in the U.S. for personal use - either in their own names or in the name of a corporation or LLC., just like any American citizen. One of the most significant decisions faced by a foreign real estate purchaser is how to take title. The factors are many and complex, so you should always consult an accountant and a tax specialist.
A few key issues are highlighted here.
- The IRS requires Foreign Nationals to pay US income taxes on any net income (rental revenues less expenses) derived from a rental property. There are many permitted deductions, like interest on mortgages, premiums on insurance, property taxes, condominium or homeowners’ association fees, depreciation of the asset, amortization of closing costs and so on, providing the opportunity for negative taxable income. Further, in future years, when the investment is generating taxable income, such income may be offset by the prior year’s negative taxable income.
- Different nations have different tax treaties with the U.S., so before finalizing any deals it is important to consult with a local tax expert in your country and possibly in the U.S. Sometimes laws may require a certain tax payment in the U.S. and a separate payment in the home nation, while others may only require taxes to be paid in the U.S.
- When selling US property, foreign nationals will be subject to U.S. capital gains taxes, and they must follow certain rules under the Foreign Investment in Real Property Tax Act, known as FIRPTA. Under FIRPTA funds received from the sale of U.S. property by a foreign national are subject to an IRS withholding: the buyer (or buyer’s closing agent) must withhold 15% of the sale price to pay directly to the IRS.
- The withheld amount is not the final tax obligation but is treated as an advance payment. The seller must still file the applicable U.S. income tax return to calculate the amount of tax due, and the amount withheld is then credited against the total income tax liability. However, there are some exceptions from the FIRPTA withholding, including if the buyer purchases the property for use as a personal residence and the sale price is less than $300,000.
- There are numerous other factors one should consider as a foreign investor in U.S. real estate, but in general it is relatively easy to purchase real estate in America! For the most up-to-date information about the process and for further tips about taxes, legal protections, and other considerations when buying American real estate, please always consult a tax specialist.
- Florida is one of the seven US states where there is no personal income tax at state level (STATE INCOME TAX). Individual income is taxed at the federal level (FEDERAL INCOME TAX) and the taxable income brackets and tax rates vary according to the table below.
FEDERAL INCOME TAX 2020
|TAXABLE INCOME BRACKETS||RATES|
|$0 - $9,875||10%|
|$9,875 - $40,125||12%|
|$40,126 - $85,525||22%|
|$85,526 - $163,300||24%|
|$163,301 - $207,350||32%|
|$207,351 - $518,400||35%|
|$518,401 or more||37%|
- The annual property tax is not uniform. The exact amount of property tax levied depends on the county in Florida the property is located in and the assessed value. The property tax bills are mailed by November 1st of each year. All tax payments are due by March 31st of the following year. The following discounts apply for early payment: 4% discount if paid in November, 3% discount if paid in December, 2% discount if paid in January, 1% discount if paid in February. The gross amount is due by March 31st. Failure to pay property taxes can result in the loss of the property.
Please note, buying real estate in the United States does not give foreign owners any rights or privileges regarding legal stay or status.