Foreign Home Buyers' Requirements to Purchase Real Estate in Florida
Foreign nationals are another segment of the buying population who purchase real estate in Florida. According to the National Association of Realtors (NAR), Florida has the largest number of foreign real estate investors in the US with 41% purchasing homes, 21% making a dual use purchase (vacation home/rental property) and 22% investing in rental property.
Foreign nationals are able to buy real estate in the US without any involvement by any US government agency. However, buying real estate in the US does not provide foreign nationals rights or privileges regarding their legal status. We recommend those interested in staying in the US longer than allowed by a standard visa to consult with an immigration attorney to fully understand applicable guidelines is recommended.
When it comes to selling US real estate, foreign nationals must adhere to rules under the Foreign Investment in Real Property Act (FIRPTA). Under FIRPTA, profit made from the sale of US real estate by a foreign national is subject to taxation. As of February 2016, 15% of the gross purchase price is withheld regardless if any profit was made. However, if the purchase price is less than $1M and the buyer intends to use the property as permanent residence for at least 6 months for the next two years then the tax rate drops from 15% to 10%. There are exceptions that would exempt the sale from taxation including if sales price is $300K and the buyer will use the property as personal residence for at least 50% of the time for the next two years, seller is a non-resident alien and has a tax identification number or the seller has retained a withholding certificate from the Internal Revenue Service (IRS).
Foreign nationals are also able to defer capital gains tax in the US by purchasing another similar investment property under Section 1031 of the IRS Code. There are strict guidelines that must be adhered to with Section 1031 Exchanges and the use of an experienced real estate attorney is highly recommended.
Foreign nationals purchasing Florida real estate for leasing purposes are subject to taxation on rental incomes. Taxes can be paid by paying 30% of the gross rental receipts or pay regular US income tax rates on net income from the rental properties. Foreign buyers need to be aware of IRS Guidelines for determining what constitutes a US resident for tax purposes. This can be somewhat complicated and a US tax or real estate attorney should be consulted prior to purchasing real estate in the US. Buyers should also familiarize themselves with the Substantial Presence Test which is used by the IRS to determine how many days an individual has been physically present in the US for tax purposes. It should be noted that a foreign property owners tax liability in his/her own country will vary depending upon where the purchaser is from and if that country has a tax treaty with the US.
Each state in the US has its own set of rules regarding the purchase of real estate including the types of contracts to be used, the method of closing the sale and responsibilities of involved parties. If you are not familiar with how real estate is sold in the US, the following will be of interest:
Real estate housing data is shared among agents using Multiple Listing Services and such information can be accessed by buyers using various real estate websites.
Real estate agents are paid by commission which are paid by the sellers so buyers don’t pay anything to have an agent work on their behalf.
Real estate agents need licenses to operate. The licensing laws of each state differ regarding how much education is required and the types of licensing exams and post licensing certification.
Qualified buyers with a 30%-40% down payment generally will be able to obtain financing for their US real estate purchase. It should be noted that many banks require foreign buyers to have a minimum amount of money on deposit. Prior to applying for a US mortgage, a foreign buyer must first establish credit and earn a good credit score. When exploring mortgage options, consider banks with global operations. These banks will have the expertise to verify credit established in other countries and guide the buyer through the home buying process.
Foreign buyers are eligible to buy single family homes, condominiums and town homes as well as duplexes, triplexes and quadraplexes. Coops often have rules prohibiting foreign ownership. Foreign buyers can purchase property in their own names or through a legal entity such as a limited partnership, corporation, joint venture, trust or limited liability company. The structure by which a buyer purchases property can have dramatic tax consequences. Unless for a homestead property exemption, it is the opinion of leading experts that a buyer should not purchase a home in their own name to limit liability, minimize taxes and ensure confidentiality.
Foreign buyers are permitted to pay all cash for their real estate purchases but they should be aware that US laws require that cash transactions over $10K be reported to the Federal Government. Additionally, as of March 2016, the Department of Financial Gains has implemented a General Tracking Order (GTO) which requires all cash transactions for real estate over $1M in Miami-Dade County be reported. This order is in effect through August 2016 as a test to determine the extent of money laundering that exists in cash real estate transactions. It is the responsibility of the title company to report such transactions; however, purchases involving wire transfers and/ or personal checks are exempt.
Buyers are typically responsible for paying the title search, insurance, legal fees and recording costs which generally fall in the 1%-2% range of the purchase price. It should be noted that it is not a requirement to attend the closing. In that event, the buyer must execute a “Power of Attorney” which is a legal document authorizing another individual to represent the buyer at the closing.
Purchasing real estate in the US can be a worthwhile endeavor but foreign buyers should use a full-time professional Realtor along with a qualified tax or real estate attorney to ensure they secure their dream property while minimizing risk and tax liability. Should you be interested in purchasing or selling residential real estate in South Florida and are not currently working with a Realtor, please do not hesitate to contact me at email@example.com or (561) 562-0109.