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Orlando, Kissimmee, Davenport, Clermont - Disney Area Investment Real Estate, Second Homes & Vacation Homes

What about taxes?

Please note that contrary to what many people are told, there is absolutely no difference in treatment between US citizens and foreign nationals when it comes to any of the taxes mentioned here, other than the FIRPTA withholding on the sale of your property (which applies to all foreign nationals).

INCOME TAX

If you are renting out your property, you will only pay US income tax on your net profit from your rental activities. This is your rental income, less all the expenses of running your property, less your US mortgage interest (UK mortgage interest is usually not tax deductible). With a US mortgage interest deduction, you may find that your taxable income is so low as not to be a problem. When you pay cash, or have a mortgage in your own country, your taxable income is greater by several thousand dollars per year. In any case, you would probably be taxed at the lower rates, which are currently 10% and 15%.

We strongly recommend that you consult with an Accountant, either here locally, or in your home country. For those in the UK or Canada, we will be happy to recommend a couple of local Accountants in our area.


SALES AND TOURIST TAX

Rentals for less than 6 months (to one individual) 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).

Sales and tourist taxes do not cost you anything. You charge the tax to your guest and then remit this tax to the government.

Long term rentals (for more than 6 months to one individual) are not subject to sales and tourist tax.


TANGIBLE PROPERTY TAX

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 of being 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
 
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.
 
There are often rumors (especially in Canada) that non US citizens are discriminated against and have to pay higher property taxes. This is completely false and 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 it.

CAPITAL GAINS TAX AND FIRPTA

If, when you come to sell your investment property, you have made a profit, you are then subject to US capital gains tax, which is up to 20%, 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.

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.

When a foreign national sells a property in the US, the sales proceeds are subject to an IRS withholding of 10% of the sales price, called a FIRPTA (Foreign Investment in Real Property Tax Act). This requires the closing agent (on behalf of the Buyer)to withhold 10% 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 60 to 90 days. If you have no outstanding tax to pay, then your 10% 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.

Please note, there is a different tax treatment for foreign nationals who elect to treat their rental properties as a pure investment, rather than a business. Please consult with a tax expert for all tax matters.

A personal note from Lesley Dolby to our Canadian buyers and sellers. . . . .

No one likes to have a 10% withholding by the IRS for two or three 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 10% is a lot of money, but here in the US, it's definitely not as high as other countries. Just saying!


 

CLICK HERE FOR A HANDY LINK TO IRS INFO FOR FOREIGN OWNERS OF US REAL ESTATE


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Lesley Dolby


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(407) 352-3664

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Dolby Properties, Inc.

5218 Ridgeway Drive
ORLANDO, FL 32819
 

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