Tax Rules for Foreigners Buying Property in the United States

Anthony Guerriero, 1/18/18 6:04 AM

Buying residential property in another country can be intimidating, but with the right broker partner, foreign citizens buying property in the United States have little to worry about. Foreign citizens are legally allowed to buy residential property in the United States, but they will have to follow certain tax rules both in the US and possibly in their home nations. Just because a buyer is a nonresident doesn’t automatically mean they must pay additional taxes. Some of these taxes might even be paid by a U.S. citizen, too, under certain circumstances. Here’s the US property tax specifics that foreign and luxury buyers need to be aware of when shopping for homes in Manhattan and Miami.

1. Foreign Investment in Real Property Tax Act of 1980 (FIRPTA)

FIRPTA is an act that creates special rules around taxation when a foreign owner or certain kinds of legal agents sell a property. In those transactions, the buyer’s representatives are responsible for withholding 15% of the sale proceeds and submitting such amount to the IRS. This is only a withholding and not an additional tax. It is required so that the government can ensure that the tax liability for the property is full paid. The amount withheld is refunded when it is found the taxes on the property are up-to-date.

 2. Tax Rules for Residential Property in Manhattan

Any residential property buyer using financing for their purchase in New York State needs to anticipate the “mortgage recording tax,” the rate of which varies based on the value of your new home. The lender will always pay 0.25% of this tax. For transactions under $500,000, the tax is 2.05% (with 1.8% paid by the buyer), and for other transactions, the rate is 2.175% (with 1.925% paid by the buyer).

In the case of certain new residential properties in New York City, the developer may require the initial buyer to pay the “transfer taxes” at both the city and state level. New York City charges a 1% transfer tax for sales under $500,000, and 1.425% for those above that threshold. New York State’s transfer tax is a flat 0.4% for all sales. This tax is only an issue when a foreign buyer is purchasing a brand new condo directly from the developer. At certain times, this amount may be negotiable, but it is standard practice for the buyer to pay these costs.

Lastly, for purchases over $1,000,000, there is a “mansion tax” of 1% in New York.  The name is misleading, but nonetheless is required.

3. Tax Rules for Residential Property in Manhattan

Around 41% of foreign buyers investing in the Miami real estate market are purchasing vacation homes. Another 23% are investing in a rental property, and 25% envision their property serving as both a vacation home and a source of rental income at different times. Each of those situations presents unique tax liability. It’s important to know that any money earned from renting out a property in the US will be subject to US tax, and also possibly your own country, as income. It’s also possible you might have to register as a sales tax dealer with the Florida Department of Revenue if you are receiving rents on your Miami property. These details are why it’s important that a realtor connect a foreign buyer with an attorney or other expert as needed, so that everything is clear before a purchase is made.

4. Estate Tax

“Estate tax,” or tax that must be paid on the value of someone’s estate when they have died, is common is many nations, but not all. Still, if foreign citizens own property in the United States at the time of their death, they will be subject to this tax. The US federal government alone may charge as high as 46% tax. However, there are ways to avoid this or hedge against it. And, many nations have tax treaties with the US that allow their citizens to have high exemptions from federal estate tax. On the state level, in New York the maximum estate tax rate is 16%.  With some up-front planning, including either setting up a Foreign Corporation to take ownership of the property or hedging the estate tax with the use of term-life insurance, foreigners can avoid or hedge against this tax. 

These details are essential, but also represent a lot of what to be concerned about if you’re considering buying residential property in the US.  It isn’t necessarily more difficult for a foreign citizen to buy property than a local, but that’s only totally true when you have expert support from day one of the property search. Manhattan Miami Real Estate specializes in helping each foreign buyer find the new residence that is a perfect fit for their needs and goals. Contact us today so we can get to work for you.

For more information on legal and tax related questions, please see these resources:


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