What taxes do I have to consider when buying, owning and selling property in the US?
Here are the taxes you will come across:
FLORIDA STATE DOCUMENTARY STAMP TAX (applicable when
transferring interest in real estate)
1) ON THE DEED
Levied by the State at $0.70 per $100 of value of any interest in property transferred. In our Central Florida area, this is traditionally paid by the seller at closing.
2) ON THE LOAN AMOUNT
Levied by the State at $0.35 per $100 of the amount loaned. Paid by the buyer (borrower) at closing, or whenever a new loan is taken out (such as refinancing). There is also a Florida State Intangible Tax of .002 levied on the loan amount (example $200 on a $100,000 loan).
INCOME TAX (only applicable when you make a profit
from renting your property)
If you are renting out your property, US federal income tax is payable on your net profit from your rental activities (there is no state income tax in Florida). Net profit is what you have left over from your rental income after deducting all the expenses of running your property, your US mortgage interest and the allowed tax depreciation. This is reported on a US tax return which is due every April 15 for the previous year. In the majority of cases, net taxable income is minimal enough to have little to zero tax liability. If you do have any US income tax liability, although you will most certainly have to report your US income on your tax return in your home country, there is no need to worry about double taxation because most countries have a tax treaty with the US, where you can claim a foreign tax credit on your home country tax return.
We strongly recommend that you consult with an accountant, either here locally, or in your home country. We will be happy to recommend a couple of local accountants in our area who are highly experienced in working with foreign nationals, particularly from Canada and the UK. We also strongly recommend that even if you have no tax due on your rental property, that you still file an annual tax return, because this will make things easier for you when you come to sell your property.
SALES AND TOURIST TAX (only applicable when you rent
your property as a short term rental)
Rentals for 6 months or less are subject to a Florida State sales tax of 6%, a local tax of between .5% and 1% and also a County tourist tax (between 4% and 5%, depending on the County). You or your property management company will originally register for these, then each month, you must file and declare the rents you have charged. You must file monthly even if you have had no rents that month, otherwise you will be charged a penalty. Sales and tourist taxes do not actually cost you anything, because you charge the tax to your guest and then remit this tax to the government. Long term rentals (for more than 6 months to the same tenant) are not subject to sales and tourist tax.
If you have someone (such as an accountant or management company) preparing and filing these returns on your behalf, we strongly recommend that you ask for copies of the filed returns.
TANGIBLE PROPERTY TAX (only applicable when you rent
your property or own a business)
If your property is used for short term rentals, it will more than likely be classed as a business (and you benefit from that, because you are able to deduct expenses). Up until recently, if your property was a furnished short term rental, every year by April you had to complete a Tangible Personal Property Tax return (either your accountant or your Property Management company may have helped you to do this). You would then receive a bill from the county at the same time as the property tax bills come out. This tax was usually a very small amount - say $100 to $300 and covered all the stuff you have in your house which makes it into a business - such as furniture and housewares! You can't run a short term rental without furniture and the county knows you have it! Each year, businesses pay a small tax for the assets in that business. In your case, the furniture and housewares are your business assets. However, there is now an exemption on the first $25,000 of tangible personal property, so most short term rental properties will have no tax to pay. You must still file an initial return in order to qualify for this exemption, so check with your accountant.
PROPERTY TAXES (applicable to everyone who owns real
Of course you will have to pay property taxes on whatever type of property you buy, whether a rental or personal vacation home or residence. The taxes are based on the assessed value of the property multiplied by the millage rate for the particular county where your property is located. A typical yearly amount for an average $250,000 property would be around $4,000. The bills arrive every year in November for that entire year (so property taxes are paid in arrears). You have until March to actually pay the bill, although payment before this offers discounts. If you have a mortgage on your property, your lender will usually pay this bill and collect from you monthly with your mortgage payments. If you have no mortgage, you are responsible for paying the bill yourself.
When you first buy your property, the closing statement will show a pro-rated amount of property taxes, based on the number of days the seller has owned and the buyer will own the property in that year. Because the buyer has to pay the bill at the end of the year for the entire year (property taxes are paid in arrears), the buyer receives a credit from the seller for the amount of days in that year that the seller has owned the property prior to closing.
The rumors you hear that non US citizens are discriminated against and have to pay higher property taxes are completely false! Although there are indeed two levels of property taxes, the higher rate has absolutely nothing to do with your nationality, or even your State of residence. This has everything to do with whether or not you actually live in the property you own. Even those of us who live in Florida have to pay the higher (non homesteaded) rate on any property we own that is not our principal residence. You are only allowed one homesteaded property and you must live in that one property as your permanent residence to get the property tax exemption. Regardless of how many properties you own in any part of the world, you can only have one official, legal, permanent residence. Your official residence is normally considered to be where you spend at least 183 days of each year, where you declare yourself a permanent resident, where the government recognizes you as legally resident and where you file tax returns on your worldwide income.
CAPITAL GAINS TAX (only applicable when you sell your
property and have made a profit)
If you have made a profit when you sell your investment property, you are then subject to US federal capital gains tax, which varies depending on your personal marginal income tax rate. However, all of the costs of purchase and sale, as well as the cost of all improvements made during the time you have had the property, are taken into account in adjusting the cost basis of your property, so these will reduce your gain. Here is a handy link to IRS info on capital gains tax
Be sure to keep all receipts for everything you spend. We suggest you hire an accountant to help you file a yearly US tax return and then use this accountant to file for you when you sell your property.
FIRPTA (only applicable when you sell your property and
you are a foreign national)
When a foreign national sells a property in the US, the sales proceeds are subject to an IRS withholding of 15% of the sales price (formerly 10% prior to Feb 17 2016), called FIRPTA (Foreign Investment in Real Property Tax Act). This requires the closing agent (on behalf of the Buyer) to withhold 15% of the selling price of your property at closing. Your accountant must prepare an exemption certificate prior to closing, which will authorize the closing agent to hold on to this money until the IRS allows them to release it to you, usually within 90 to 120 days. If you have no outstanding tax to pay, your 15% will be released to you. If this certificate is not presented to the closing agent prior to closing, then they are obligated to remit this to the IRS at closing and this could then take one or two years to be refunded. There are a few exceptions to the FIRPTA withholding requirement, but these are not common in our area.
A personal note from Lesley Dolby to our
Canadian buyers and sellers about FIRPTA. . . . .
No one likes to have a 15% withholding by the IRS for three or four months when they sell their property, because they are a foreign national. However, as a US citizen, when I sold my two personal properties in Canada in 2006 and 2008, Canada Revenue withheld 25% from my sales price, because of being a US citizen. We often hear that people think 15% is a lot of money, but here in the US, it's definitely not as high as other countries. Just saying!
Here are some links to relevant informational website for taxes:
We recommend you consult with a tax expert for all tax matters, especially if you have considerable wealth or if you have complicated family circumstances or concerns about estate planning.