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There are several options for how to hold title on your Florida real estate. However, if you are financing, you only have one option. Lenders require your property title to be in the individual’s name(s).
If you pay cash, some of the more common ways you can elect to hold title are as an individual, as a U.S. or foreign corporation, as a limited liability corporation (LLC), or as a trust.
How You Hold Title Determines Your Property Tax Liability
We want to begin by emphasizing two key points:
- First, the biggest consideration for how to set up your property title is how each scenario will affect your tax liability, especially capital gains and estate tax. Estate tax (tax on your right to transfer property at your death) can be particularly onerous if not planned for up front.
- Second, the tax codes are generic, so it is really important to find out how your specific situation may be affected based on the tax treaties that exist between the U.S. and your home country. Many countries have tax treaties with the U.S., which can reduce or eliminate certain tax obligations in/to the U.S.
Each form of ownership has its tradeoffs—some large, some small. Our advice, as always, is to make an informed choice. Everyone’s financial and personal circumstances are unique; it’s worth investing the few hundred dollars to find out whether the pros of using an LLC or foreign corporation to hold ownership make sense for you.
Below we illustrate some of the tax advantages and disadvantages of the most commonly used ways to own U.S. real estate available to nonresidents.
Property Title and Individual Ownership
Taking title in the individual’s name is the most frequently used option for holding property title. Its advantage is that it is the method that results in the least amount of U.S. income tax when a property is sold.
If the property is held for at least one year before it is sold, the maximum tax is calculated at 15-20 percent (depending on the individual’s tax bracket) of the profit. If the net income from any one year is greater than $250,000 there is an additional 3.8 percent tax on the gain.
However, this could be the most disadvantageous way of holding title if the non-resident dies while still owning the property. The estate tax is assessed on the fair market value of the property at the date of death of the owner. It is payable to the IRS no later than nine months after the date of death and, if not paid in a timely manner, it is subject to penalties and interest, which are payable in addition to the estate tax.
For non-U.S. residents, the estate tax applies to property valued in excess of $60,000. The marginal rate for the estate tax imposed on the estate of decedents dying after December 31, 2012 is 40 percent.
U.S. Corporate Ownership
Non-residents are eligible to take title to U.S. real estate in the name of a U.S. corporation. Unlike individual ownership, the corporation does not get the preferential capital gains tax rate of 15 percent or 20 percent (depending on one’s tax bracket) on long-term capital gains.
If the property is located in Florida, then there is a state corporate income tax of 5.5 percent of profit in excess of $5,000 that must also be paid. The overall highest federal income tax rate for property in Florida held through a U.S. corporation is approximately 38 percent.
Compared to the maximum individual tax rate of 15%-20% on the sale of the property, the corporate income tax rate is very high. This is obviously a disadvantage of U.S. corporate ownership of real estate.
The potential advantage of U.S. corporate ownership of U.S. real estate is from the standpoint of U.S. estate taxes. Although the value of shares in a U.S. corporation owned by a non-resident is generally subject to U.S. estate tax upon the death of the owner, estate tax treaties with certain countries (for example, United Kingdom and Germany) provide for an exemption of these shares from the U.S. estate tax. This can be a substantial benefit for those non-residents who qualify.
Foreign Corporate Ownership
This is a fairly rare method to hold title and brings with it some complications. But is worth knowing about as it may suit your unique personal situation, especially if you are older, don’t have an income as such, and are seeking to avoid estate tax.
The foreign (non-U.S.) corporation is subject to the same income tax rates as the U.S. corporation. The advantage of the foreign corporation lies with the U.S. estate tax. Unlike the U.S. corporation, all nonresidents are exempt from U.S. estate tax upon their death if the property title is held by a foreign corporation. The country of residence of the owner is irrelevant.
U.S. Limited Liability Corporation Ownership
U.S. limited liability companies have become increasingly popular as an alternative for ownership of U.S. real estate by non-residents, due to their extreme flexibility.
The limited liability company is a legal entity. The taxability of a limited liability company is dependent on several factors. A limited liability company with two or more members is taxed as a partnership, unless it has elected to be taxed in another manner, such as a corporation.
If the limited liability company has only one member and it has not elected to be taxed as a corporation, then it is treated, for income tax purposes, as a “disregarded entity” and the owner is taxed directly.
For example, if the owner of a single-member limited liability company is a foreign individual, then the rules and tax rates applicable to foreign individuals will apply. The single-member limited liability company will provide the owner with limited legal liability, but it will be taxed in the U.S. for income and estate tax purposes as if the company did not exist.
Because there are so many variables involved, it is critical that you understand your options and how they relate to your given circumstances when it comes to deciding how to hold title on your new Florida property.
Your Realtor should be able to put you into contact with an accredited tax consultant to find out what will ultimately make the most sense for you before you buy so that your transition into your new Florida home is smooth and worry free.