Tax Rules for Foreigners Buying Property in the United States

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 how to buy property in America as a foreigner, for homes in Manhattan and Miami.

1. Can a foreign citizen purchase real estate 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 are not the best type of property for a non-US citizen, as 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 homebuyers 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.

Learn more about the Difference Between Condo and Coop.

 2. What is "FIRPTA"?

FIRPTA is an act that creates special rules around taxation when a foreign owner or certain kinds of legal agents sell a property. It’s a withholding tax that all foreign sellers of property are required to pay to ensure they have no outstanding obligations to the IRS.

When a foreigner purchases property in the U.S., the buyer’s representatives are responsible for withholding between 10% and 15% of the sale proceeds and submitting such amounts to the IRS. This is only a withholding and not an additional tax. The amount withheld is refunded when it is found the taxes on the property are up-to-date.

 3. What taxes do foreign buyers pay when looking to buy an apartment 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).

• For purchases over $1,000,000, there is a “mansion tax” of 1% that steps up to 4% for properties priced at $25 million or more.
• 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% 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.

4. What about foreigners selling NYC Real Estate?

• 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 liable for FIRPTA tax. 
• On the federal level, capital gains tax totals 21% of the net capital gain. 
• New York City charges a capital gains tax on non-resident sellers of 8.82%.
• If you’re receiving rent income from your property in Miami, you may have to register as a sales tax dealer with the Florida Department of Revenue
• Realtors should connect foreign buyers with an attorney or other expert so everything is clear before the purchase is made

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

An “estate tax,” or tax that must be paid on the value of someone’s estate when they have died, is common in many nations. If foreign citizens own property in the United States at the time of their death, they will be subject to this tax.

• In New York State, the maximum estate tax rate is 16%. 
• On the federal level, the United States charges as high as 46%.
• Up-front planning can help foreign citizens leverage U.S. tax treaties or set-up Foreign Corporations or LLCs to avoid or hedge against this tax.
  
  

6. What advantages or disadvantages are there when purchasing property as an individual rather than a corporation or LLC?

Buying as an individual

• Advantages: Individuals pay capital gains taxes at a slightly higher maximum rate (23.8%) than corporate entities pay their federal taxes (21%).
• Disadvantages: less privacy and increased liability in case of law suits.

Buying as an LLC or a Foreign Corporation

• Advantages: Extra privacy and lawsuit protection. If the LLC has a foreign buyer as the sole member, pays a capital gains tax of 23.8% vs. the corporate rate of 21%. If buying as a foreign entity, the buyer avoids the estate tax upon death
• Disadvantages: Higher capital gains tax. If the buyer is an LLC as an individual, the buyer is liable for estate tax. If the LLC is a foreign entity, they pay capital gains tax as high as 21%

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

The United States has many tax treaties with other countries which determine tax rates and exemptions. Some foreigners can claim estate tax exemptions up to  $11.2 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 to see the details of your country’s treaty.

8. 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.

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

• Quick Foreign Buyer's Facts

• How to Invest in Manhattan Real Estate