Real Estate Purchases and Sales in the US

Winter 2004 CSANews Issue 53  |  Posted date : May 16, 2007.Back to list

The ownership of a real estate property in the United States brings several important tax aspects into play. An understanding of these implications enables one to plan a sale or purchase without encountering problems.
In Florida, there are two benefits which residents receive that can impact on non-residents. The first is the HOMESTEAD EXEMPTION. In early times, to encourage northerners to settle in Florida, a law was passed which exempted the first $5,000 of assessment on a residential property from municipal taxation. This sum was increased over time, and now the exemption is $25,000, but it is only for property owned by a person who is resident in Florida. In immigration terms, the owner must be either a United States citizen, or possess lawful permanent resident status. Persons who are in the United States on a temporary basis, even though holding a visa of some type, are not eligible.

The second benefit for residents is the "SAVE OUR HOMES" amendment to the Florida Constitution. Amendment 10 is a state constitutional amendment that applies to homestead-exempt property. This amendment limits annual increases in assessed value of homestead property to no more than three per cent, or the change in the consumer price index, whichever is less. This continues so long as the Florida resident owns the property, and applies each year.

However, if the property changes hands to either a resident or non-resident in the first year of new ownership, the assessment on the property goes to current market value, with appropriate taxes. If the new owner is entitled to the homestead exemption, an application would have to be made for same, and the exemptions will apply to the new assessment.

Therefore, in buying a property, one must be aware of these implications when considering what the taxes will be for the new owner. If the property was entitled to the exemption, the taxes in the new year may be considerably higher than what had been payable in the previous year.

Sale of a real estate interest involves federal tax considerations in Florida. Any gain is taxable, although if a property was purchased prior to November of 1984, the value in November 1984 is the starting value no matter what was paid for the property at the time of purchase. In calculating the gain, such items as the costs in acquiring the property, costs of sale of the property, costs of improvements, special assessments and taxes in the year of sale are deductible. At present, the maximum rate of taxation of the gain is 15 per cent, although with exemptions on the tax form the rate of taxation comes out at about 12 per cent.

To make sure that the United States government is paid the tax owing, a scheme of collection has been devised. Generally (there is a procedure available to predetermine the tax and have to pay only the actual tax owing), 10 per cent of the sale price is deducted by the title company at the time of the closing of the sale and is forwarded to the federal government. The law imposes an obligation on any party involved in the sale, including the seller, real estate agent, or title company to make sure that the sum is forwarded within 20 days of the closing. If not, those persons are liable for the money. The procedure required to avoid the withholding is very complicated, involving the furnishing of all pertinent information to the government and waiting for a determination. In most cases, it is not convenient as the sale needs to be closed and waiting for the exemption certificate can take some time.

After the sale has closed, application can be made for a refund of the overpayment if the 10 per cent withheld is more than the actual tax owing. Two procedures are available: to apply immediately, forwarding all pertinent information to the tax authorities and making the calculation; or to wait for the end of the year and make application by filing a non-resident tax return, the 1040NR. The latter procedure is easier, as one only has to report the bare figures on the 1040NR, whereas the other procedure requires all documentation to justify the figures.

To apply for the refund, a TAXPAYER IDENTIFICATION NUMBER (TIN) is required. Each person applying for the refund must have a tax number. In the case of two owners, the sale would be split between them and a separate withholding sent for each person. Thus, each would have to apply for a number.

Until recently, one could apply for a TIN in the abstract – one did not have to justify the reason for applying. Currently, one must give the reason for applying and send documentation to prove it. In the case of a sale where an application for refund is filed, an application for a TIN is sent along with the refund application. It is sent to the TIN issuing office and they issue the number, put it on the refund application and forward the application to the taxation authorities. They also send a notification of the number to the individual filing the return. At one time, a sale of a property for a foreign person could not be completed without the person having a number, but that proved too cumbersome, so the above procedure was adopted.

For those who happen to have a Social Security number, there is no need to apply for a TIN. That number serves as the tax number. Social Security numbers are no longer available to aliens unless they are authorized to work in the United States.

Having this knowledge enables the non-resident real property owner to understand the procedures which must be followed in owning or selling a residential property. Mobile homes are not included in these procedures unless the land is owned by the mobile home owner. Ownership of a share in a park is not considered ownership of the land for these purposes.