FOREIGN BUYERS OF FLORIDA REAL ESTATE

WHAT YOU NEED TO KNOW ABOUT U.S. AND FLORIDA TAXES


As a foreign buyer of Florida real estate you should know the potential tax issues so that you may better navigate any concerns relating to acquisition, ownership and disposition of any real estate. The process is not cumbersome and this merely should serve as information so that you can better plan your purchase. We work with foreign buyers of real estate in Southwest Florida on a daily basis including Canadian, German, Swiss, Austrian, British, Brazilian and other foreign nationals. 

 



So what should you be aware of before you sign on the purchase contract? Each of the below discussed points depend on your country of residence. There may be a treaty that can improve any tax situation with respect to the U.S. tax, both income and estate tax. Currently there are 16 estate tax treaties with the U.S. and these countries include Australia, Austria, Canada, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, Netherlands, Norway, Republic of South Africa, Switzerland and the United Kingdom. In addition, the type of property you purchase will also affect the taxes you pay. Here we refer to personal use vs. income producing. How long you will hold the real estate is also crucial and whether you intend to pass the home or condo to a spouse or children, and what the nationalities of the heirs or beneficiaries are. The last point is that there may or may not be complexities involved if you are considering a multi-tiered structure in order to minimize the impact of the taxes. Fortunately there are many things you can do in order to minimize these issues, even if you are from a country that does not have an estate tax treaty with the U.S. These can include obtaining a life insurance policy to pay for the estate tax or financing the purchase with non-recourse debt. In addition, we know that avoiding the estate tax is not always the main motivation of a foreign buyer.

Below you will find common errors or misconceptions that we have found buyers to make when not prepared or properly advised.

ESTATE TAXES

An often overlooked fact is that estate taxes do matter when buying Florida real estate. The U.S. dictates a top estate tax rate of up to 40 percent on any foreign individual's gross estate (US real esate and other assets including U.S. stocks) located in the U.S. in excess of $60,000. That pretty much encompasses all foreign buyers. If you own real estate in the U.S. you will be subject to this estate tax if you pass on without properly structuring your estate. Even if you own a property in a joint situation, unless the surviving owner can put to a test that he or she contributed to the original purchase, this person will also be taxed on the full value of this real estate.

FOREIGN CORPORATIONS
If properly set up, a foreign corporation can offer protection from the U.S. estate tax since these foreign shares are outside the U.S. However, if not set up properly, then you are not guaranteed protection. One way of structuring this is to have the foreign corporation enter into a lease agreement with the foreign corporation any time you use the property for personal use. This means that there is a rent paid to the foreign corporation, otherwise the Internal Revenue Service may view your U.S. based property as being directly owned by you, triggering U.S. estate taxation.

CORPORATE STRUCTURE
Foreign corporations are not always the best way to benefit from holding U.S. real estate when it comes time to sell. Although there may be U.S. estate tax protection, the same does not apply to the capital gains incurred at disposition. When selling a property, you are subject to Federal and Florida corporate income taxes which can total up to 38 percent. Foreign corporate earnings can also have an additional 30 percent tax imposed called branch profits tax. The popular Limited Liability Corporation or LLC is considered a "pass-through" entity and subject to capital gains taxes of up to 20 percent in 2013. Therefore, if you intend to buy and invest in Florida real estate, this may be a much better alternative.

REAL ESTATE TRANSFER
Although we have seen meaningful reform in the Foreign Investment in Real Property Tax Act or FIRPTA since 1980, in order to increase foreign investment in U.S. real estate, you are still subject to U.S. income tax under this act. As a foreign buyer you are required to put aside 10 percent of the gross proceeds or the fair market value when selling, transferring or gifting your respective U.S. property. This is the law irrespective of any gains or income tax liabilities due to any type of transfer of the property. The new law in 2013 also imposes a gift tax on any U.S. real estate transfer if the gift exceeds US $14,000 or US $143,000 if made to your spouse. This means that if for instance you or joint tenants with rights of survivorship own U.S property, equal shares of the real estate trigger a potentially taxable gift tax. This is why it is important to analyze the associated tax liabilities before transferring title.

LENGTH OF STAY
If you spend more than 183 days in the U.S. over a three-year period, you are deemed a U.S. resident for income tax purposes. We have had many buyers mistakenly believe that if they remain up to six months in Florida each year, they are not subject to this. This is called the "substantial presence" test and technically makes you a resident if you remain for more than 120 days per year. Exceptions to this come into play if you physically spend less than 183 days in one tax year and you have a residence, family or a business in another country that has an income tax treaty with the U.S. 

Although we are not attorneys, we specialize in helping you navigate and mitigate these potentially adverse tax consequences if you want to purchase one or several Florida properties.

Please know that each buyer has unique circumstances and goals as it relates to plans of acquiring U.S. based property. Therefore no structure is identical to the next. As real estate brokers there is no requirement to address these issues which we have raised above, however, at Parker Carson International Group, we can recommend that you seek the advise of U.S. tax professionals who specialize in international taxation and cross-border issues. Structuring and planning will help save you money. We have outstanding partners who can work with you regarding these issues.

Buyers generally do not pay any commissions when working with a real estate agent !


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