REAL Exclusive Magazine

Taxing Matters For Non-Residents Who Own U.S. Real Estate

By Patricia Tan

What season Is it? Some might say “Spring” as temperatures are in the 70s, others may say “Tourist Season” as they sit patiently in heavy traffic, but as I write this article I am working on my annual accounts, so I would say “It’s Tax Season!”

It is this time of year when I get questions from some of my overseas customers who are working on their tax returns too, and I thought it might be useful to spend a few minutes looking at how foreign real estate owners are viewed by the U.S. tax system.

First, I must say I am a REALTOR and not a CPA or tax advisor. When tax questions arise, I refer my customers to an expert in this field. I have worked for many years with Renea Glendinning, CPA who heads the international tax practice of Kerkering Barberio from their offices in downtown Sarasota. I thank Renea for allowing me to reproduce some of her sage advice here.

Foreign residents who own real estate in the United States generally pay taxes when that property generates income, when they sell the property and make a capital gain, and potentially at the time of their death.

Most of us are familiar with filing our annual Federal tax returns. It may surprise you to know that a foreign owner of real estate who receives rental income may choose whether to file an income tax return or not! How so? U.S. tax laws allow a foreign owner, or his rental agent, to simply remit 30% of all rental income directly to the IRS. While this negates the need to file a tax return, it is not always the most efficient approach from a tax perspective. Many overseas landlords choose to file an itemized return and benefit from deductions which can include property taxes, mortgage interest, repairs, depreciation and other expenses.

A strong real estate market coupled with the strength of the U.S. Dollar means this could be a good time for foreign owners to sell their property here and realize a capital gain. The Foreign Investment in Real Property Tax Act (FIRPTA) was enacted in 1980, and revised last year, to ensure that foreign owners who dispose of real estate assets pay any capital gains tax due, prior to repatriating funds to their home country. This is achieved by a “withholding”. Simply put, at the closing of a real estate transaction, the closing agent withholds 10% or 15% of the sale price of the property and remits this amount to the IRS. The amount held usually far exceeds any tax which will be due. The seller then files a tax return showing the capital gain and actual tax due. The IRS deducts tax due from the withheld amount and refunds the balance to the seller. Sounds easy, but the process can be tedious and it may be a long time before the seller of real estate receives his funds from the IRS. The good news for foreign sellers is that there are some things that can be done to reduce the amount of the withholding. Your tax advisor can assist with this, but do consult with them sooner rather than later. Don’t wait until a few days before closing, or worse, once the withholding has been made.

While income and capital gains tax calculations are very similar for U.S. residents and non-residents, that is not the case for estate tax. For instance, the U.S. tax resident enjoys a significant tax exemption on the value of their estate. Not so for most non-residents. This is an area where foreign owners would most definitely benefit from detailed tax planning with their CPA or tax attorney. Estate tax planning can be done at any time. For example, how you hold title to a property can have a significant effect on estate taxes. If you already own real estate, title can be changed to provide a more efficient estate tax strategy – it is not too late.

Whatever season it is, let’s hope it’s not too taxing!

Patricia Tan was born in England, and her career in international sales and marketing led her to live and work in many countries around the world before moving to Sarasota in 1997. Patricia is a Certified International Property Specialist (CIPS), Graduate Realtor Institute (GRI), and Transnational Referral Certified (TRC). She is involved in global activities of the Sarasota, Florida and National Association of Realtors, and currently serves as NAR President’s Liaison to U.K. Her real estate business operates from Coldwell Banker on St Armands Key, where her focus is to bring international buyers to the local market. She regularly makes marketing trips to Canada, Asia and Europe, to promote Florida’s Gulf Coast and the Sarasota area in particular. Patricia may be reached at 941-504-9232 or Pat@PatriciaTan.com.

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