Direct Ownership of Real Property for Foreign Investors

Foreign investors see Florida as a stable and secure place to invest in real estate and land and lots for sale.  Foreigners easily can purchase real property in the United States unlike some countries that make it difficult for foreigners to own real estate.  The weakening of the U.S. dollar and lower real property prices due to foreclosures make these investments even more attractive for foreign investors

Direct ownership of U.S. real property by a non-resident alien is probably the least complex structure and has some advantages.   A principle advantage is the long term income tax treatment currently at 15 percent.   Another advantage is possibly avoiding some unintended tax issues such as triple taxation that can occur when a U.S. parent company owns a foreign wholly owned subsidiary that disposes of U.S. real property held by the foreign corporation.   Another advantage is that the transaction is more transparent and less subject to IRS scrutiny.

Foreign investors looking to purchase real property that will become a future residence should consider direct ownership.   Section 121 personal residence gain exclusion rules apply to foreign investors, but additional rules must be met.   A foreign investor currently must live in the residence 50 percent of the time over the course of the two 12 month periods.   A foreign investor is also limited to investment real estate purchases of $300,000 or less.   The Housing Assistance Tax Act of 2008 has modified some of the rules for section 121 gain recognition by making it necessary in some cases to allocate some of the gains to periods of nonqualified use thereby reducing the deduction that might be received.

There are a number of disadvantages to direct ownership as well.  A direct owner will be required to file a U.S. income tax return because the real property creates the assumption of a business or trade.  Also a direct owner can be exposed to estate tax issues which can often times involve higher tax rates.  A direct owner will pay income tax at the time real property is disposed of, which may not necessarily be true under other structures.

When real property is disposed of it is treated as though the individual was in a trade or business under code section 897.  Section 897 rules do not affect residency status, so foreign real property holders need to review residency separately from their real property holdings.  Though real property is treated as a trade or business at disposal any rental income may be treated differently. To learn more contact a 9 Core Realty Representative here.


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