The resilient South Florida residential real estate market is back in business. For the second consecutive year, Miami was named among the top 10 luxury property markets in Christie’s International Real Estate report. What sets Miami apart from the other cities on the list, including Paris, New York and Sydney, is the relative value it offers, making it extremely attractive to investors, especially foreign buyers looking to invest funds from their home countries. Cash-rich investors from Argentina, Brazil, Venezuela and other Latin American countries are fueling the latest boom, often outlaying 50% or more in cash to finance their investments.
For a foreign investor, seizing the moment and identifying a property is generally the easy part of the investment process. Choosing the right structure for the acquisition from a legal, tax and risk standpoint, isn’t quite as easy (or enjoyable). And some foreign investors might not realize the potential U.S. tax-related pitfalls that can come with buying a U.S. property.
If you’re a foreigner considering purchasing a property in South Florida, proper planning is required to make sure your investment doesn’t come with any unexpected financial surprises. As such, here are five simple steps you may want to consider:
1. Find a U.S. tax professional with international tax expertise.
Investing in U.S. property can involve significant financial implications under the Foreign Investment in Real Property Tax Act (FIRPTA) and other U.S. tax laws, so you need a U.S. tax advisor who understands the complexities of the tax code.
As the saying goes “nothing in life is certain but death and taxes.” This couldn’t be more apropos than when it comes to acquiring U.S. property (i.e., United States Real Property Interest or “USRPI”). In every scenario, there will be some form of U.S. tax ramification, and depending on your situation, U.S. estate taxes may also come into play. As such, it is vital to meet with a tax professional who can help guide you through the process.
Tip: It is generally more advantageous and cost-efficient to engage a U.S. tax professional before you acquire the property, rather than after, as restructuring (i.e., transfer of U.S. property) may prove costly and result in U.S. gift or income tax consequences.
2. Ask your accountant and attorney about the most optimal structure under which to acquire the property.
Every transaction is different and every buyer has unique facts and circumstances. So it’s imperative to find the optimal structure that best fits your situation. For example, a foreign investor acquiring several rental properties may not want to acquire all of the properties under a single entity because that may expose him or her to a greater amount of liability from a legal standpoint. Likewise, foreign investors who value anonymity may choose a structure that shields their identity, while others may value a structure that minimizes any potential U.S. tax liability. In the end, the structure should address the investor’s unique facts and circumstances while fitting his or her needs and goals.
Tip: Although it’s usually the most common structure utilized, acquiring the property in an individual or joint capacity is generally not the most optimal structure for foreign investors.
3. Apply for an ITIN.
An ITIN is an individual tax identification number. It’s similar in format and purpose to a Social Security number, but ITINs are strictly for foreign nationals. An ITIN allows a foreign individual to file a U.S. tax return and, when disposing of a U.S. property, may ultimately reduce the amount of U.S. tax withheld at closing.
The process to obtain an ITIN can be cumbersome. Kaufman Rossin is authorized by the IRS to process ITINs on behalf of our clients as a Certified Acceptance Agent. Rather than visit the local IRS office or Tax Assistance Center to certify documents, a foreign applicant can make an appointment at our office to facilitate the application process.
Note: ITINs expire if not used on a federal income tax return for five consecutive years.
4. Consider filing an annual tax return to record your property’s activity.
If your USRPI is an investment or rental property, chances are it may generate an annual operating and tax loss. In order to preserve those losses and offset them against any possible gain in the disposition of the property, you must file a U.S. tax return. A special U.S. tax election must be made to obtain the use of deductions that will generate such losses.
Keep in mind: If you file as an individual (Form 1040-NR), you will need to disclose the number of days you spent in the U.S. during that specific tax year. Foreigners who exceed the threshold for number of days spent in the U.S. for three consecutive years as per the substantial presence test will generally be considered U.S. residents for tax purposes under the Internal Revenue Code and will be taxed on their worldwide income.
5. If you sell the property, consider filing a withholding certificate.
Under FIRPTA, a withholding agent is required to withhold 10% of the gross proceeds upon the disposition of U.S. real estate by a foreign seller, irrespective of the gain on the sale. For example, if you are selling an investment property for $500,000, the withholding agent would withhold $50,000 at closing. The amount withheld must be submitted to the IRS within 20 days of closing.
A withholding certificate may eliminate or significantly reduce the amount held at closing to the extent the ultimate U.S. income tax liability from the gain of the sale is less than the amount withheld, and you need an ITIN to obtain this certificate. Many foreigners are hesitant to send their money directly to the IRS, so the filing of a withholding certificate is an option to address this concern.
Tip: If the sale of the USRPI is toward the end of the calendar year, a foreigner may consider foregoing the filing of a withholding certificate as the funds withheld at closing and sent to the IRS can be retrieved upon filing a U.S. tax return at the beginning of the following year.
If you’re a foreigner who is considering purchasing a U.S. property, contact me or another member of Kaufman Rossin’s international tax team. We can help you navigate the complexities of FIRPTA and ITINs and advise you on structuring the deal in a way that will align with your financial goals.
To learn more, download our free whitepaper for foreigners buying U.S real estate.