- Foreign Nationals: Special Property Rules
Stranger in a Strange Land:
Foreign Nationals and U.S. Real Estate
By: Raymond J. Bowie, Esq.
Everyday, quietly and without fanfare, aliens are busy buying, selling and leasing millions of dollars of Southwest Florida real estate. They don’t go by names like Mork, Alf or E.T., and none of them even remotely resemble the bug-eyed monsters popularized in 1950's sci fi flicks. Nonetheless, like the premise of the hit film Men in Black, government agents are keeping very close tabs on their movements.
The aliens dealing in local real estate are, of course, citizens of other nations rather than other worlds. And the government agencies monitoring their real estate movements are nothing more esoteric than the Internal Revenue Service, U.S. Commerce Department, U.S. Agriculture Department, Florida Department of State and Florida Department of Revenue – although their agents do sometimes wear black.
These various government agencies require the reporting of certain real estate transactions involving foreign nationals – officially called "non-resident aliens" – and sometimes also the withholding of income taxes on such transactions. These obligations are imposed not only upon foreign nationals, but also often upon the U.S. citizens and real estate professionals who deal with them. With foreign nationals so heavily involved in Southwest Florida real estate markets, it pays for all players to know the government's rules.
- Buying and Selling Real Property
- Foreign nationals can freely buy U.S. real estate for their own personal use as a residence, either in their own names or through corporations or other entities, without having to report to any government agency. Things get stickier, however, when foreign nationals or entities go to sell U.S. real estate.
- Under a 1980 tax law called the Foreign Investment in Real Property Act or “FIRPTA”, sales of all U.S. real estate interests are to be reported to the IRS and every buyer must collect from every seller 10% of the gross sales price for payment of taxes – unless the transaction falls within certain exceptions. What’s interesting about FIRPTA is that it presumes that all property sellers are foreign nationals unless proven otherwise. And unless exempted, it forces the buyer to act as a tax collector for the seller’s taxes.
- The intent of FIRPTA is to prevent foreign nationals from making a profit selling U.S. real estate and expatriating the proceeds before it can be taxed in this country. Under U.S. tax laws, the general rule is that all profits made in the U.S. by foreign nationals are subject to U.S. taxation.
- Fortunately, most real estate sales are, in fact, exempt. The most common exemption: The sale is not reportable if the seller is signs an affidavit that he is not a non-resident alien, i.e. that he is a U.S. taxpayer with provides his tax identification number. Hence, FIRPTA does not apply when the seller is a U.S. taxpayer. There's a second exemption that is available even when the seller is a foreign national: If the sales price is $300,000 or less, and the buyer will use the property as a personal or family residence at least 50% of the time the property is occupied over two consecutive 12-month periods following closing. And there is a third exception: If the foreign seller applies for and obtains a “withholding certificate” from the IRS, the buyer can rely upon this IRS certificate directing either that no tax is due or a tax amount lesser than the 10% is due.
- If the seller is a foreign national and none of the exemptions apply, the buyer is required by FIRPTA to withhold from the seller 10% of the property's sales price at closing and pay it over to the IRS. This is not necessarily the amount of tax that the foreign seller actually owes on the sale. But it does require the foreign seller thereafter to file with the IRS a non-resident tax return reporting the actual profit on the sale, upon which U.S. taxes are calculated. If the actual tax due is less than the 10% withheld from the sale, the foreign seller receives a refund of the difference.
- It is critical to note that the burden under FIRPTA to withhold tax on real estate sales is placed on the buyer, not the seller. The buyer can properly rely upon the seller’s affidavit or IRS withholding certificate. But otherwise if the buyer fails to withhold tax from a non-resident alien seller, the buyer himself is liable to the IRS for any tax due, plus interest and penalties.
While foreign nationals do not usually have to report their purchase of U.S. real estate, reporting is required in their purchase of certain investment real estate.
Foreign nationals or foreign entities buying certain large real estate tracts must report their purchase to the U.S. Department of Commerce under a Federal law called the International Investment and Trade in Services Survey Act. The information on the Survey Act forms is kept confidential and used by the Commerce Department to issue periodic reports on the extent of foreign investment in the U.S.
Information to be reported includes the names and addresses of the buyers, the sellers and all owners of more than a 50% interest in the property, as well as income, expense and financing data about the property. Property used solely for the purchaser’s residential use is exempt from reporting. A partial exemption from some of the reporting details is available for property under 200 acres priced under $1,000,000. But foreign purchasers must report full details of all property purchases costing more than $1,000,000 or amounting to 200 or more acres.
Failure to file may incur civil fines up to $25,000, and deliberate refusal to file is a criminal offense. Moreover, if a foreign purchaser fails to report as required, any real estate broker or other party involved in the purchase must file the report or risk similar penalties.
Foreign buyers or sellers of agricultural land exceeding 10 acres must also file an information report with the U.S. Agriculture Department under another Federal law, the Agricultural Foreign Investment Disclosure Act.
This law covers any foreign citizens or entities or even U.S. corporations owned more than 5% by foreign interests, which buy, sell or convert to non-agricultural use any property used currently or within the previous 5 years for agricultural, timber or forestry production. This law basically covers real estate which has been used for growing things commercially. In areas such as Southwest Florida where large tracts of agricultural land often are being sold for future development, or thereafter rezoned for residential or commercial use, any foreign nationals or entities participating in such transactions may be subject to this law.
Required reports to the Agriculture Department disclose names of the buyers, sellers and personal identification of any foreign nationals involved in the transaction, as well as details about the transaction and land use intentions of the owners. The penalty for failure to report can be as much as 25% of the property’s market value.
As when they sell U.S. real estate, foreign nationals who rent their property here are subject to tax withholding on all rent and similar payments made by their tenants.
With rental income, however, the foreign landlord gets to choose how he is to be taxed. He can either be subject to a tax withholding of 30% of his gross rents, to be collected and remitted to the IRS by his tenant or property manager. Or instead the foreign landlord can file a Form 4224 with the IRS and elect to be taxed at regular U.S. income tax rates on his net income from the property. Most knowledgeable foreign landlords do the latter, since the tax bite will be less on the net income after expenses and it avoids withholding.
Here again, however, the tax law puts the burden on any tenant or property manager who pays rent to a foreign landlord. Unless the foreign landlord furnishes a copy of his IRS Form 4224, the tenant or property manager is required to withhold 30% from each rent payment owed the landlord and remit it to the IRS. If they fail to do so, both the tenant and property manager become liable for the landlord’s taxes.
The tax rules are even tighter when a foreign person loans money on U.S. real estate and receives mortgage payments. As with rents, the person making loan payments to a foreign lender must withhold 30% of all interest paid and remit same to the IRS. The only exception to this withholding is if the foreign lender uses competent tax counsel to draft his mortgage note in such a way that the interest is deemed to be “portfolio interest.”
In addition to the reporting obligations imposed by Federal laws, the state of Florida also has certain filing requirements for foreign citizens and business entities relating to real estate.
If it owns Florida real estate or a mortgage on Florida real estate, any foreign business entity or U.S. corporation owned 10% or more by foreign interests must have a registered Florida office and resident agent on file with the Florida Department of State. In addition, any foreign business entity doing business from real estate it owns or renting its property to another business must also register with the same agency for authority to do business in Florida. Finally, any foreign national who must collect sales tax on rents he receives must register as a “sales tax dealer” with the Florida Department of Revenue, in order to remit the sales tax to the state.
Actual tax treatment of non-resident aliens is a very complicated matter in which these general rules are often modified by particular tax treaties between the U.S. and their home countries. Furthermore, income tax is often only one concern of foreign nationals buying, selling or leasing U.S. real estate. U.S. estate and gift taxes must also weigh in their concerns. Before engaging in real estate transactions, especially as to commercial properties, foreign nationals should consult attorneys with expertise in both U.S. and international taxation.
Foreign nationals engaging in U.S. real estate transactions are surely strangers entering into a very strange land. Neither Mork, Alf, E.T., nor invading Martians ever had to cope with real estate reporting and taxation requirements. Indeed, such statutes seem so intimidating that perhaps they may actually constitute Earth’s true line of defense against any actual invaders from space.
It is, however, a tribute to the attractiveness of U.S. real estate that so many foreign nationals buy, sell, lease and operate real property here even in the face of these legal complications.