Before agreeing to manage U.S. real property for a foreign taxpayer, a real estate professional or rental agent should discuss with the foreign client whether the rental income will be taxed as investment income through withholding, or on a net income basis as â€œ effectively connected with a U.S. trade or business,â€ without withholding (although the owner may have to file estimated tax returns). Rental income from real property located in the United States and the gain from its sale will always be U.S. source income subject to tax in the United States regardless of the foreign investor's personal tax status and regardless of whether the United States has an income treaty with the foreign investor's home country.
The method by which rental income will be taxed depends on whether or not the foreign person who owns the property is considered "engaged in a U.S. trade or business." Ownership of real property is not considered a U.S. trade or business if it consists of merely passive activity such as a net lease in which the lessee pays rent, as well as all taxes, operating expenses, repairs, and interest in principal on existing mortgages and insurance in connection with the property. Such passive rental income is subject to a flat 30 percent withholding tax (unless reduced by an applicable income tax treaty) applied to the gross income rather than the "net rent" received. Thus, the real estate taxes, operating expenses, ground rent, repairs, interest and principal on any existing mortgages, and insurance premiums paid by the lessee on behalf of the foreign owner-lessor, must be included in gross income subject to the 30 percent withholding tax. The gross income and withheld taxes must be reported on Form 1042-S, Foreign Persons U.S. Source Income Subject to Withholding (PDF) to the IRS and the payee by March 15 of the following calendar year. The payor must also submit Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons (PDF), by March 15.
If, on the other hand, the foreign investor is engaged in a U.S. trade or business such as the developing, managing and operating a major shopping center, the rental income will not be subject to withholding and will be taxed at ordinary progressive rates. Expenses such as mortgage interest, real property taxes, maintenance, repairs and depreciation (accelerated cost recovery) may then be deducted in determining net taxable income. The nonresident must make estimated tax payments for the tax due on the net rental income, if any. The only way these expenses can be deducted, however, is if an income tax return Form 1040NR for nonresident alien individuals and Form 1120-F for foreign corporations is timely filed by the foreign investor.
Foreign individuals and foreign corporations may elect to have their passive rental income taxed as if it were effectively connected with the U.S. trade or business. Once such an election is made by attaching a declaration to a timely filed income tax return, there is no obligation to withhold even in a net-lease situation. Once made, the election may not be revoked without the consent of the IRS. Unless the foreign investor has properly informed the property manager that the rental income is to be treated as "effectively connected income" by submitting to the property manager with a fully completed Internal Revenue Service Forms W-8ECI, Certificate of Foreign Personâ€™s Claim for Exemption From Withholding on Income Effectively Connected With the Conduct of a Trade or Business in the United States (PDF), the property manager should withhold thirty percent (30 percent) of the gross rental receipts so as to avoid personal liability. A fully completed Form W-8ECI must include a valid U.S. tax identification number for the foreign landlord (in other words, the rental agent must withhold and remit the 30 percent tax to the IRS until this requirement is satisfied). A real property manager who collects rent on behalf of a foreign owner of real property is considered a withholding agent and is personally and primarily liable for any tax that must be withheld. The liability of the withholding agent includes amounts that should have been paid plus interest, penalties, and where applicable, criminal sanctions. Property managers who do not comply with these rules will be held liable (either individually or through their company) for 30 percent of gross rents, plus penalties and interest. Also, property managers need to report annual rents collected on behalf of foreign landlords on Forms 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons, and 1042-S, Foreign Personâ€™s U.S. Source Income Subject to Withholding. These are the equivalent of Forms 1096 and 1099-MISC but are for foreign owners.
We will try to describe these options from least difficult to most difficult.
PERMANENT RESIDENT ALIENS
These people are able to apply for a loan in exactly the same conditions as any US citizen. Loans to these customers are purchased automatically by Fannie Mae and Freddie Mac. The person must show us the â€œgreen cardâ€ issued to him by the Immigration and Naturalization Service (INS). Sometimes the bank will ask for an authorization to contact the Social Security Administration ( SSA) to confirm the social security administration. These borrowers have access to all loan programs, first mortgages, second mortgages, home equity lines of credit and mortgage insurance. Borrowers must have a valid social security number.
H1B VISA HOLDERS
H1B visas are issued to international workers who come to the United States for a definite period of time. Usually between three and six years. Normally banks treat these applicants as permanent residents, in some cases they will ask to see a petition to extend the residency permit. Interest rates and conditions will be similar to those offered to US citizens. The SSA will have provided these applicants with social security numbers.
Known as the Employment Authorization Document ( EAD) the work permit is given to students, fiancÃ©es of US citizens, foreign diplomats, special workers. Fewer banks are willing to provide a mortgage to these persons due to the short term they are allowed to stay in the country. Other banks state that they are only concerned that the person is in the US legally and will provide a mortgage under normal conditions.
It has become very difficult to obtain mortgage financing for foreign nationals in the last year. Fannie Mae and Freddie Mac have removed those options from their offerings. Most national mortgage lenders that provided foreign national mortgages no longer offer them. Several banks in Florida still offer loans to foreign nationals who are buying property in that state. The borrower usually has to put 25% as down payment and provide proof of employment and credit in his native country. They must provide a tourist visa that allows them to visit the US and the home they buy in the US will be considered a second (vacation) home for them. It is unfortunate that this kind of financing is so restricted at this moment. Investments by foreigners at this time of a glut in the housing market and a weak dollar would open up many options to sell homes.
For many years the Internal Revenue Service ( IRS) has provided non US citizens with Individual Tax Identification Numbers (ITIN). These numbers are used by the IRS to track (and be able to tax) income from dividends, savings, commissions and other income generated in the US. The ITIN does not allow the person to live or even be in the United States, it is only a medium for tax control. Some companies however are using the ITIN to identify their customers in credit transactions and thus reporting them to the credit bureaus. A limited number of national banks offer mortgages to ITIN holders. Some banks will use the ITIN number when assigning customers checking, savings accounts and CDs. Some local and regional banks offer mortgage loans to customers with ITINs. These customers provide a history of employment, sometimes alternative credit documents ( utilities, insurance bills, retail accounts, cellular phone bills) and bank statements to qualify for a mortgage loan. At one time loans for these customers only required 3% down payment, now most programs require between 10% and 15% down payment.
Your property taxes will be assessed the same way as well. Homeowners in Florida who use the property as their primary residence enjoy a $50,000 reduction in the assessed valuation (if the property has a valuation above $75,000). Their are also limits to the incased valuations allowed on an annual basis that are more beneficial on homesteaded property. But the answer to your question is the property tax rate to you as a Canadian in no different.
Always at Your Service,
Tom Priester e-PRO
"Results Driven Real Estate"
Keller Williams Realty
Indeed, the process is available for you to purchase US Real Estate. The real 'key' is having the right team to handle your transaction. There are some details - which mostly apply to selling. I represently buyers from Europe, S America, Canada and the Carribean. I recommend a consult with an Attorney and/or Title Company(Closing Agent) prior to making your decisions. Real Estate Professionals in the US can not advise you in legal matters.
I'm in the Deltona area. We have listings available which for showing, immediately.
Don Wollard, Realtor, CDPE, CIAS, REOS, SSC, 1031
39 years of service
Deland / Deltona / Volusia County
Distressed Property Expert
Short Sale and REO Broker
Certified Investor Agent Specialist
The laws in Florida make it very easy for you to purchase property with no special rules. In fact the purchasing process is the same as it would be for anyone. When you do sell there is a hold back of 10% of the purchase price to ensure any capital gains taxes are paid. International loans are more expensive so try to pay cash or borrow the funds in Canada if possible.
Other than that the purchasing process and costs to hold the property make it an easy process. I deal with many of your Countrymen who are seeing the incredible value in Florida property and with the favorable exchange rate a great time to invest.
If your search brings you to Palm Beach or Martin Counties I would be very happy to work with you towards meeting your goals. The current market is really a perfect storm and in my opinion Florida real estate in the right location is one of the absolute best investment opportunities we will see in our lifetimes.
Best of luck and if I can offer anything additional please let me know.
Always at Your Service,
Tom Priester e-PRO
"Results Driven Real Estate"
Keller Williams Realty
Canadians can absolutely buy houses in Florida. Florida is a great investment area for buyers from many countries. If you are paying cash everything will go very easy. If you need a mortgage you may have a little more work to be done. Everything is possible.
If I can be of further service please let me know.