According to a recent survey conducted by the National Association of Realtors, for the 12-month period ending with January 2015, international buyers (“Foreign Nationals”) invested $82.5 billion in U.S. residential real estate, which equates to about 4.8% of total U.S. sales. The top-five international buyers were from the United Kingdom, India, Mexico, China and Canada for purchases in primarily Arizona, California, Florida and Texas. These homes are primarily purchased as vacation homes, for investment, or as temporary professional relocation and also include those buying investment land. It is important for Foreign Nationals to understand both the process and unintended tax and estate planning considerations which may arise.
PURCHASING PROPERTY IN THE U.S.
Purchasing property in the U.S. especially FL land for sale can be a transparent and efficient process. Unlike in many countries where buyers must bounce from agent to agent to find a property, new listing for sale are generally required to be posted on a listing service within 24 hours so that active listings are available to all brokers and agents.
Sales commissions are always paid by the seller and are divided equally between the buyer’s and seller’s brokers. While some seller’s brokers may engage in dual representation, that is, representing both the seller and buyer in a transaction, it is always advisable for a buyer to work with an exclusive buyer’s agent who will better protect the interest of their client.
FOREIGN NATIONALS MUST CONSULT WITH A TAX SPECIALIST IN THEIR HOME COUNTRY
There are a number of differences between a Foreign National and U.S. National when Foreign Nationals purchase real estate in the U.S. A Foreign National should seek local tax advice in their primary residence, as overall tax liability may depend upon the Foreign National’s home country tax treaty with the US, if any exists. As an example, if the property was owned for more than one year, the capital gains tax rate in the U.S. is 20%, but a Foreign National could be required to pay a different rate depending on the home country’s tax treaty with the U.S. and structuring of the transaction.
ELECTION TO PAY U.S. INCOME TAXES ON NET RENTAL INCOME
The IRS requires Foreign National to elect to pay US income taxes on any net income (rental revenues less expenses) derived from a rental property. The penalty for this election not being made on a timely basis is an assessment of 30% tax on gross rental income. Moreover, an investor would not be able to deduct any expenses such as depreciation, interest, property taxes, or common area charges. Taxes must be filed even if the Foreign National is incurring tax losses in order to take advantage of the various tax deductions available.
RENTAL INCOME DEDUCTIONS
The IRS provides various opportunities for property expenses for an investment property to be deducted from rental income. Mortgage interest, common area charges, property taxes, depreciation of the asset over 27.5 years, insurance, and amortization of closing costs are all deductions against income, providing the opportunity for negative taxable income. In future years, when the investment is generating taxable income, such income may be offset by the prior year’s negative taxable income (a.k.a. tax loss carry forward), which can result in a tax-efficient investment for many years.
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