Florida offers some very attractive properties for that beach-front living lifestyle. But any foreigners looking to buy real estate, open a business, work or live in the United States need to understand that the country’s tax laws have everything to do with that person’s residency status.
In general, resident aliens are taxed in the same manner as U.S. citizens on their worldwide income, and nonresident aliens are taxed according to special rules contained in the Internal Revenue Code (I.R.C.). A distinguishing feature of this tax regime concerns the source of income: a nonresident alien (with exceptions) is subject to federal income tax only on income from sources within the United States and/or income that is connected with a U.S. business or occupation.
Although the tax residency rules are based on the immigration laws concerning immigrants and non-immigrants, the rules define residency for tax purposes in a way that is different from the immigration laws. If you are an alien (not a U.S. citizen), you are considered a nonresident alien, unless you meet one of the following two tests during the calendar year:
Green Card Test
You are a resident, for U.S. federal tax purposes, if you are a Lawful Permanent Resident of the United States at any time during the calendar year. This is known as the “green card” test. You are a Lawful Permanent Resident of the United States, at any time, if you have been given the privilege, according to the immigration laws, of residing permanently in the United States as an immigrant. You generally have this status if the U.S. Citizenship and Immigration Services (USCIS) issued you an alien registration card, Form I-551, also known as a “green card.”
- You continue to have U.S. resident status, under this test, unless:
- You voluntarily renounce and abandon this status in writing to the USCIS,
- Your immigrant status is administratively terminated by the USCIS, or
- Your immigrant status is judicially terminated by a U.S. federal court.
Substantial Presence Test
You will be considered a United States resident for tax purposes if you meet the substantial presence test for the calendar year. To meet this test, you must be physically present in the United States (U.S.) on at least:
- 31 days during the current year, and
- 183 days during the 3-year period that includes the current year and the 2 years immediately before that, counting:
- All the days you were present in the current year, and
- 1/3 of the days you were present in the first year before the current year, and
- 1/6 of the days you were present in the second year before the current year.
For example: you were physically present in the U.S. on 150 days in each of the years 2016, 2017, and 2018. To determine if you meet the substantial presence test for 2018, count the full 150 days of presence in 2018, 50 days in 2017 (1/3 of 150), and 25 days in 2016 (1/6 of 150). Since the total for the 3-year period is 225 days, you are considered a resident under the substantial presence test for 2018.
The Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) income tax is a tax that authorizes the United States to tax foreign persons on dispositions of U.S. real property interests. According to the Internal Revenue Code, a “disposition” means a sale or exchange, liquidation, gift, redemption, or transfers of real property.
What does this mean to you? It means that if you are a nonresident alien owning property in your name in the U.S., and you wish to sell that piece of property, you will be taxed an additional tax. At the closing table, the buyer/title company is required to withhold 15% of the sales price. If the buyer fails to do so, he is held responsible for the payment of the exact amount under the FIRPTA to the IRS. The nonresident alien must then submit documentation to the IRS requesting a refund of this withheld 15% sales price. The IRS holds this 15% as an assurance that the nonresident alien will file their US taxes timely and accurately. Once this is complete, the 15% is refunded to nonresident foreign seller.
Don’t Pay Uncle Sam More than you Should
There is no cookie cutter tax rule that applies to all U.S. residents and all nonresident aliens. Rather, different tax laws will apply differently to each person’s circumstances. For this reason, foreign citizens should seek the advice of professional legal counsel and tax specialists to help improve tax efficiencies domestically and abroad where they own property.