US Tax Implications for Brazilian Citizens Buying US Real Estate
Investing in U.S. real estate has become increasingly popular among Brazilian citizens, not only because of the Real’s strength against the Dollar but also because of the surging real estate prices in Brazil. When a Brazilian citizen purchases real estate in the United States there are several tax pitfalls that can be avoided through careful planning with the assistance of a qualified professional specializing in the area of international taxation.
(1) Estate Tax. The estate tax is a tax imposed by the U.S. federal government on your right to transfer property at your death. The U.S. estate tax applies to U.S. citizens and residents and to any foreign individual with property that is considered U.S.-situs property, such as real estate located in the United States. The current estate tax rate is 35% of the fair market value of the property at the time of the individual’s death; however, for 2013 this rate is expected to increase to 55% if Congress does not act to renew the prior tax cuts that had lowered the estate tax rate.
A personal exemption exists which allows a set dollar amount of property to pass tax free, no matter who inherits it. For foreign individuals with U.S.-situs property that exemption amount is a mere $60,000 dollars compared to the $5 million for U.S. citizens and residents. By way of a simple example, let’s say that you purchased an apartment in Miami in 2000 and you passed away this year while the property was valued at $600,000 dollars. Only $60,000 of that $600,000 would be exempt from the 35% tax and the total tax owed at your death would be $169,800. With careful structuring of your investment by a professional specializing in this area, this “death” tax can be avoided altogether.
(2) Foreign Investment in Real Property Tax Act (FIRPTA). FIRPTA is a U.S. tax law that imposes a withholding tax on foreign individuals who dispose of property in the United States (hereinafter referred to as USRPI, which stands for United States Real Property Interest). A USRPI can be the actual real estate itself or shares in a holding company whose primary assets are real estate. If the seller of a USRPI is a foreign individual or company, the buyer must withhold 10% of the amount realized on the disposition of the USRPI.
For example, say that you, a foreign individual, sell a piece of land and realize a gain of $100,000. The buyer of that property is required to withhold 10% or $10,000 dollars of the gain and send that money to the IRS. You must then report the sale of that USRPI by filing a U.S. Federal Tax Form 1040-NR (Form 1120-F if the seller is a company). If the amount of tax due on the sale is less, the IRS will refund you the additional amount that was withheld. Certain exemptions from FIRPTA withholding may apply; however, notification requirements must be met and therefore, a professional qualified in this area should be consulted before selling the property in order to properly comply with these requirements.
(3) Capital Gains Tax. In the U.S., a capital gains tax is imposed on the profit realized from the sale of real property. Capital gains are generally taxed at a preferential rate in comparison to ordinary income tax rates which can be as high as 35%. The tax rate will depend on the individual investor’s tax bracket and the amount of time the investment was held before being sold. An investment held for a year or less before being sold is considered a short-term capital gain and the gain from this investment is taxed at the investor’s ordinary income tax rate, which as mentioned above can be as high as 35%. Gains on dispositions of property held for more than one year are considered long-term capital gains and are taxed at a lower rate than short-term capital gains. The tax on long-term capital gains is usually 15% unless, based on the amount of income earned, the investor falls into the lowest two tax brackets and then the rate is reduced to 0%. These preferential tax rates for long-term capital gains are not available for corporations and therefore, corporations pay tax on long-term capital gains at ordinary rates which are as high as 35%. In order to take advantage of these preferential tax rates as an investor, proper planning with a tax professional that practices in this area is required before purchasing the property.