Christophe R. Richard
Re/Max Advance Realty
Cell: 786-327-7929
Fax: 305-663-1213
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Foreign Investors Q&A
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There are so many questions that a real estate professional has to face when dealing with investors. The following guide addresses some of the most common legal and tax questions. 
 
 
Q – What should  investors take into account prior to signing a real estate purchase contract?
 
A One should consider the form in which title or ownership is to be held so as to take advantage of potential U.S. estate tax and gift savings. On the one hand, we have individual long-term capital gains rates, which are currently at 15 percent. On the other hand, the purchase may be structured so that the foreign investor takes title to U.S. property through one or more entities in order to avoid estate tax, but this approach may cost more in fees and potentially higher income tax rates.
There are also non-tax considerations, such as whether the property will be for personal use, rented or sold in the short term for a profit. If the foreign investor plans to seek financing is also a very important consideration. In the current lending environment, most lending institutions no longer offer foreign national financing. However, there are a few major banks that remain active in this niche that require a minimum down payment of 30 percent of the purchase price or appraised value of the property.
 
 
 
Q – Does a foreign investor have to pay U.S. income taxes?
 
A - Yes, just like U.S. citizens, non-residents are required to pay U.S. income tax only on their U.S. income source, and enjoy certain exclusions from paying U.S. income tax on their bank account interest. If the foreign investor, however, holds a green card or spends a substantial part of the year in the United States, they they will most likely be considered a resident for U.S. income tax purposes.
Foreign investors should consult with a tax specialist to determine whether certain expenses are deductible and whether the gain on sale will be taxed in more than one country.
 
 
 
QWhat is the Foreign Investment in Real Property Tax Act (“FIRPTA”)?
 
A - FIRPTA imposes an income tax on the sale of any U.S. real property interest. This includes U.S. real estate owned directly by a foreign individual, as well as shares owned by a foreign person in a U.S. corporation that owns substantial real estate. To ensure that taxes due on sale by a foreign investor, the closing agent or transferee of the U.S. property, is obligated to withhold 10 percent of the purchase price at closing and send it directly to the Internal Revenue Service, instead of paying the full amount realized to the foreign seller. The amount of the foreign seller’s final U.S. tax obligation is determined by crediting the withholding tax against the amount of the income tax indicated on the return.
Individual Capital Gain Tax Rates: If an investor is a non-resident individual and the real estate qualifies for capital gain treatment, the net capital gain will generally be subject to the current tax rate of approximately 15 percent.
Corporate Capital Gain Tax Rates: If the investor is a foreign corporation and the real estate qualifies for capital gain treatment, the net capital gain is currently subject to a possible tax rate in excess of 35 percent.
 
 
 
Q -  What other income tax consequences may occur under FIRPTA?
 
A - If a foreign investor has already purchased a property in his or her individual name, or jointly with another person, changing title may be costly. It may create income tax consequences under FIRPTA, as well as additional transfer and doc stamp taxes.
 
 
 
Q Is it possible for a foreign investor to avoid recognizing a gain on sale?
 
A - Yes, Section 1031 of the U.S. Internal Revenue Code makes it possible for a foreign seller to avoid recognizing a gain on the sale of property by “exchanging” it for another investment property. If the exchange qualifies under the U.S. law, recognition of the gain for the foreign seller will be deferred and no FIRPTA income or withholding tax will be due on the transaction. Please note that to qualify for the 1031 exchange exemption, several requirements must be met.

 

 

In summary, there are a number of legal issues and tax consequences for the foreign investor from the purchase stage to the eventual sale of the property. Therefore, the advice of a tax professional and qualified lawyer is recommended

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Christophe R. Richard  ♦  Coldwell Banker 12155 South Dixie Hwy. Miami, FL 33156
christophe@miamiamericaninvest.com   ♦  Tel:  786-327-7929  ♦  Fax:  305-253-0554
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