Investing in Florida Real Estate

There are two kinds of taxes associated with owning residential property, property taxes (which everyone pays regardless of resident or non-resident), and capital gains taxes (due upon sale or disposition of the property).

Under U.S. tax tax law, all persons, whether foreign or domestic, must pay income tax on dispositions of interests in U.S. real estate (U.S. real property interests). Domestic persons are subject to this tax as part of their regular income tax.

Foreign Investment in Real Property Tax Act (FIRPTA), 26 USC 897, is a United States tax provision that imposes income tax on foreign persons disposing of United States real property interests. Tax is imposed at regular tax rates for the type of taxpayer on the amount of gain considered recognized. Purchasers of real property interests are required to withhold tax on payment for the property. Withholding may be reduced from the standard 10% to an amount that will cover the tax liability, upon application in advance of sale to the Internal Revenue Service.

Foreign persons are taxed only on certain items of income, including effectively connected income and certain U.S. source income. Foreign persons, however, are not taxed on most capital gains. FIRPTA treats gain on disposition of an interest in United States real property as effectively connected income subject to regular tax.

In order to ensure tax collection from foreign taxpayers, FIRPTA requires buyers of U.S. real property interests to withhold 10% of the sales price. The seller may apply to the IRS to reduce this 10% to the amount of tax estimated to be due. The IRS routinely and quickly approves such seller applications.

FIRPTA applies in virtually all cases where a foreign owner of a U.S. real property interest disposes of (sells) such interest. Provisions of the law which would prevent recognition of gain generally do not apply unless the seller receives a U.S. real property interest in a qualifying nonrecognition exchange.

Again, please consult a tax accountant before you invest in any real estate in the U.S.