Owning an investment property in the USA is attractive to foreign investors. Some of the reason are that the US market is diverse in its size and selection of available properties, these properties are seen as secure investments, and there are few restrictions on purchasing by a foreign investor.
The downside for a foreign buyer? According to the National Association of Realtors recent report, Profile of International Home Buyers in Florida, 48% of foreign investors who decide not to buy cite taxes as the reason. Both in terms of property taxes and exposure to US tax laws.
That brings us to FIRPTA, or the Foreign Investment Real Property Tax Act, which in the Sunshine State stands for “Florida Investors Running Pell-mell To Airport.”
In a nutshell here’s how it works: you are a foreign investor and you sell or rent a property you own here in the US. When that happens 10% of the proceeds from your sale or rent are witheld by the IRS. It seems simple enough.
But as a US citizen I am confused by the tax code…just imagine being a foreign investor! You have to pay property taxes, and if you stay in the US longer than 182 days in three years you may pay income taxes. Oh, there’s the doc stamps on the sale, too. Let’s not even talk about the non-tax taxes like CDD fees, condo fees, and association fees. As a real estate agent, by the time you get to the part about 10% witheld when you go to sell, a foreign buyer is just as likely to throw their hands up and say, “You know what, Costa Rica is just as warm, just as pretty, and I don’t have to worry about taxes!”
The FIRPTA has a noble intention. “Let me explain it like this,” writes Phoenix broker and Realtor Jay Thompson in his blog, “prior to the passing of FIRPTA in 1980, it was possible for a non-US citizen to purchase real estate in the US, sell it at a profit, and not pay a nickel in taxes. As you can imagine, the IRS was none-to-pleased about this. So FIRPTA became law.”
To comply with FIRPTA, a foreign citizen who is going to sell (or collect rents from) a property needs what is alternately called a TIN or ITIN (Individual Taxpayer Identification Number) from the IRS. This may take a few weeks to a few months to get. And as such it could delay the closing on a residential real property, or delay the rental of a property. Only then can the sale commence or the rental commence.
And then to get that 10% back the seller will have to hire a US accountant, one that’s familiar with FRIPTA reporting, to prepare an income tax return.
And there’s a bit of back end danger as well…as written the buyer is responsible for collecting the tax, witholding it, and transmitting it to the IRS! WHOA!
Now, according to the title people I’ve talked to and seminars I’ve attended, and in practical application, it’s the title company that will actually withold the 10%, or the property manager in case of rentals, and transmit it to the IRS. But the buyer is still technically on the hook if it isn’t collected, and even the real estate agents can lose their commission if it isn’t collected.
So, like all things taxes, it begs the question…can’t this be done just a little easier? The law has a good intention and a realistic purpose, but the more hurdles you throw at buying real property…especially investment style properties like beach condos and commercial space in the St. Augustine market…the less investment you see and the more the market stagnates.
In other words, wouldn’t it make more sense to can FIRPTA and get 10 hard-to-sell beach condos sold to foreign investors, or to have FIRPTA and sell zero condos to foreign investors and have the condos sit and depreciate?
Read more about FIRPTA at the IRS website.