Foreign national investors love Florida. It is a state that by its many attractions like its geographic position, tourist-based economy and tropical climate attracts more than one hundred million visitors per year who come by air, land, and sea, providing a constant real estate supply that is attractive as an investment to foreign nationals that visit Florida.
Residential and commercial properties are going up in price fast, becoming not only just a property abroad but a form of safe investment against devaluations and fluctuations of currencies, markets and stocks in other countries.
Disclaimer – This is only an informational summary, do not use it as an actual tax guide. If you need tax advice, please contact a tax attorney or CPA
A foreign national investor, or persons who do not have a social security number, can buy and sell real estate properties in Florida without restrictions, but it is important to know certain basic legal information about buying and selling properties in Florida because each state has different real estate laws.
The first and most important thing to know is that when you buy or sell real estate in Florida unless bought directly from the owner, you must use the services of an authorized agent with a valid Florida Real Estate License for such operations (a Realtor), if not you risk being part of a fraudulent operation that could be punishable by law.
Your real estate agent assisted by a title company or attorney will prepare, advice, explain and inspect the documents signed in front of a Notary Public.
Closing the Deal
Foreign national investors may visit the property while in Florida, but they do not need to be in Florida for the closing of the purchase or the sale operation (when the property is legally transferred to the new owner). The only warning to this rule is if it is a financed property (if there is a mortgage involved), then just about every lender wants the buyer to sign the closing documents in the US. They will not accept signings at embassies or consulates, so be prepared to travel if need be.
You can read more about mortgages for foreign nationals here: Financing a home purchase when you are a foreign national
The buyer or the seller, or both, can appoint a legal representative while in Florida who is authorized to sign all the documents with a power of attorney. Do not spend your money unnecessarily on attorney fees, most title companies can provide you with a power of attorney (POA). These POAs are specific for selling or buying a property, and cannot be used for any other transaction, so they are quite safe.
Closing on a property with a power of attorney is absolutely common practice because it can save a great amount of money in travel related costs, such as flights, hotel, rental vehicle, and meal expenses.
Capital Gain Taxes
The United States requires that every income must pay taxes. A non-resident foreign national who receives an income from the property may select how to pay its net income tax (property income minus expenses) derived from the property income.
If this election is not made soon (such as, income tax returns that have not been filed) a 30% income tax will be assessed.
Under this situation, the foreign national investor could not deduct any expenses such as repairs, depreciation, interest, contributions, common charges, etc.
Even if the foreign national investor has losses to deduct in the first years of its investment, and therefore does not owe any taxes to the government, they still need to file the annual IRS declaration on time to be able to make the selection.
When foreign buyers finance their purchase with an initial payment of 40% and 50%, they probably will not pay taxes on the net income for the first 10 to 15 years, because the government of the United States is very generous when allowing those expenses to be deducted from the rental income.
Many common expenses can be deducted from the gross income:
- Mortgage interests
- Common charges
- Property Taxes
- Depreciation of assets over 27.5 years
- Home Owners Insurance
These are deductible expenses from your income taxes. Hire a CPA to find out everything that you can expense.
Foreign National Investor and the Real Estate Property Tax Act (FIRPTA)
When a foreign national investor sells their property in the United States the Internal Revenue Service wants to be sure to collect on any capital gains taxes.
As of February 2016, the IRS retains 15% of the price of the gross purchase of the property.
You can read more here: FIRPTA
If the buyer of the home from the foreign national investor will reside in the home more than 50% of the time and the home sales price is under $300,000.00, the purchaser is not obligated to retain the 15% tax.
For the full list of exemptions from the IRS read more here: Exceptions from FIRPTA Withholding
Foreign buyers and estate taxes
This information is not meant to be real legal advice, and should not be used s such. If you want to plan your estate, you should retain the services of a Lawyer that specializes in this field.
When a foreign national owner dies, his/her estate will pay taxes the IRS for about 46% of the capital gains. You can avoid this easily if the foreign buyer plans such an eventuality for its heirs.
By creating a Limited Liability Corporation (LLC) and a Foreign Corporation (FC) of the following structure: the LLC would own the property, and the Foreign Corporation would own the LLC. The foreign national would be the owner of the shares of the Foreign Corporation.
Under this new legal structure, since the property is owned by the Foreign Corporation, the IRS would not collect any taxes due to the death of the foreign owner.
This structure also allows the easy transference of the property from one party to another party, by the sale of the shares of the Foreign Corporation instead of the sale of the real estate that could generate the highest cost of payment of capital gain taxes to the Government.
It is recommended that the owner of an investment property create an LLC, at least to maintain the property. By having this structure it limits the owner’s liability to the value of the LLC.
If the foreign national owner does not want to maintain the LLC and the foreign corporation, perhaps because the investment is too small, an alternative would be to buy a life insurance in the equal amount of the value of the property.
For example, a 40-year-old person in good health would pay around $350 per year for a life insurance policy. This would pay the beneficiary $500,000. The owner could not avoid paying taxes, but the heirs would receive the insurance money after his/her death.