TAX & LEGAL ISSUES

For Foreigners Buying US Real Estate

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ANSWERS TO FAQ’S OF FOREIGN BUYERS AND SELLERS OF NEW YORK REAL ESTATE BY PIERRE DEBBAS, ESQ., OF ROMER DEBBAS LLP

1. Can a foreign citizen purchase property in the United States?

 

Yes, a foreign citizen can purchase property in the United States. Co-operatives (co-ops) can be very difficult for foreigners to buy and perhaps not the best type of property for a non-US citizen, since co-ops usually have many restrictions including subleasing. Therefore, most foreigners find it easier to purchase a condominium (condo). Co-op boards interview all purchasers, regardless of their nationality, and are legally able to accept or reject a buyer without any reason. This interview process requires a lengthy review of personal and financial information about the buyer, and co-op boards are not likely to cater to owners who don’t live primarily in the property. Condos, however, often have a much simpler review process, in which the condo board waives what’s called the “right of first refusal,” which gives them the privilege to purchase apartments before outside buyers. Condos also allow for buyers to sublease their properties and make their purchase using a trust, a domestic LLC, or even a foreign corporation. Each of these business structures can help give buyers extra protection against liability, and also grants tax advantages to foreign purchasers.

2. What does "FIRPTA" mean?

 

The Foreign Investment in Real Estate Property Tax (FIRPTA) is a withholding tax that all foreign sellers of property are required to pay in order to make sure the seller is up to date with all their current tax obligations to the Internal Revenue Service (IRS). This tax totals between 10% and 15% of the total sale, but the tax is also refundable if the seller has paid all their taxes, including income taxes, capital gains taxes, and others.

3. What taxes do foreign buyers pay when purchasing property in New York City?

 

A buyer’s status as a nonresident alien does not in and of itself result in specific additional taxes. All property buyers, including U.S. citizens, may potentially pay some of these taxes when buying properties in New York City:

 

  • For purchases over $1,000,000, there is a “mansion tax” of 1%.
  • Certain properties—some types of new developments—the developers of the property might require a buyer to pay the “transfer taxes,” which are charged both at the city and state levels. New York City charges a 1% tax for sales under $500,000 and 1.425% for sales above that price. New York State’s transfer tax is a flat 0.4% for all sales. This tax is not something buyers will be responsible to pay if their property is not a new development.
  • For buyers who are securing financing for their purchase, there will also be a “mortgage recording tax,” of which the lender always pays 0.25%. For sales under $500,000, that tax totals 2.05% (so 1.8% to be paid by the buyer), and for all other sales the tax is 2.175% (so 1.925% to be paid by the buyer).

4. What taxes do foreign sellers pay when selling property in New York City?

 

Foreign sellers will be responsible for FIRPTA (see above) and capital gains taxes. On the federal level, capital gains tax totals 20% of the net capital gain, which is the amount of money the seller earns on a sale after subtracting the original purchase price they paid, closing costs, and the costs of any improvements on the property. New York City also charges a capital gains tax specifically on non-resident sellers totaling 8.82%.

5. Are foreign owners of US property required to pay the estate tax?

 

The “estate tax” is a tax that must be paid upon a person’s death. For foreign citizens who own property in the United States at the time of their death. In New York State, the maximum estate tax rate is 16%. On a federal level, the United States charges as much as around 40%. United States citizens and some foreign citizens whose home countries have certain tax treaties with the United States have high exemptions, up to $5.43 million per person (or $10.9 million per couple). Non-US citizens have only a $60,000 exemption. Therefore, foreign owners may want to structure the deal so as to avoid the estate tax or hedge against it. 

6. Are there any ways to mitigate estate tax burden?

 

The most common way for foreign nationals to avoid paying the estate tax is to set up a limited liability company (LLC) in New York State. Then, an off-shore company is established (for example, a British Virgin Island company, or “BVI”) to take sole ownership of the LLC. When the owner of the property dies, it is not the property that is passed on to their heirs, but shares in the BVI, which is a foreign corporation and therefore not subject to estate taxes.

7. What advantages or disadvantages are there when purchasing property as an individual?

 

Individuals pay capital gains taxes at a lower rate (20%) than corporate entities pay their federal taxes (40%). For a foreign citizen who might sell property in the United States, that means there are capital gains tax advantages to selling as an individual instead of as a BVI owning a domestic LLC (see above). That said, it is possible to avoid corporate tax rates by establishing a domestic LLC in which the foreign owner of property is the sole member. In this circumstance, the LLC is considered a “pass-through” entity, and taxes are charged not at the corporate rate of 40%, but at the individual rate of 20%.

 

The primary disadvantages of purchasing property as an individual are liability and a lack of privacy. Individuals are susceptible to law suits, whereas an LLC can protect the foreign assets of a foreign buyer from any liability. Additionally, individuals are required to register their basic information with the city and state of New York whenever they purchase property, and that information becomes public record.

8. What are the advantages or disadvantages are there when purchasing property as a corporation or limited liability company?

 

The primary advantages of purchasing as a corporation or LLC are extra privacy for the foreign purchaser and extra liability protection (see above). There are two primary ways of purchasing property using an LLC, and each has its own advantage and disadvantage:

 

  • Buying as an LLC with the foreign buyer as the sole member allows the buyer to be capital gains taxed at an individual rate (20%) instead of a corporate rate (up to 40%), but leaves the owner susceptible to the estate tax.
  • Buying as an LLC with a foreign entity (such as a BVI) as the sole member allows the buyer to avoid the estate tax upon death, but will open them up to paying capital gains taxes at a corporate rate as high as 40%.

9. How will my home country's tax treaty impact my tax liabilities?

 

Countries routinely enter into tax treaties in order to determine how each nation’s citizens and businesses would be taxed by the other country. The United States has many of these treaties with other countries, and these treaties determine tax rates and exemptions from certain types of income. The details of these treaties vary widely. Some treaties will offer additional exemption for foreigners when it comes to estate tax, allowing them to exempt as much as $5.43 million. Other treaties don’t cover estate taxes at all, limiting a foreign property buyer’s estate tax exemption to $60,000.

 

Visit the IRS website at the following link in order to see the details of your country’s treaty, if they have such a treaty with the United States. http://www.irs.gov/businesses/international/article/0,,id=96739,00.html

10. What is a I.R.C. 1031 exchange and can foreign buyers use it?

 

When an investor sells an investment property, that investor is able to defer all of their capital gains taxes if they choose to invest 100% of their net gain from the sale into the purchase of a new investment property in the United States. This is called a “1031 transaction,” and it’s something that a foreign buyer can use to avoid capital gains taxes as well as FIRPTA withholding (see above). Note that if a foreign seller chooses to utilize this exchange, they must identify their new investment property within 45 days of a sale, and must close on that property within 180 days.

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