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Tax deductions

FIRPTA Withholding – Foreign Investment in Real Property Tax Act

Foreign Investment in Real Property Tax Act

FIRPTA (Foreign Investment in Real Property Tax Act) Withholding is the Withholding of Tax on Dispositions of United States Real Property Interests

The disposition of a U.S. real property interest by a foreign person (the transferor) is subject to the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) income tax withholding.

FIRPTA authorized the United States to tax foreign persons on dispositions of U.S. real property interests.

Persons purchasing U.S. real property interests (“transferee”) from foreign persons, certain purchasers’ agents, and settlement officers are required to withhold 15% of the amount realized.

Withholding is intended to ensure U.S. taxation of gains realized on disposition of such interests. The transferee/buyer is the withholding agent. If you are the transferee/buyer you must find out if the transferor is a foreign person. If the transferor is a foreign person and you fail to withhold, you may be held liable for the tax.

One of the most common exceptions to FIRPTA withholding is that the transferee (purchaser/buyer) is not required to withhold tax in a situation in which the purchaser/buyer purchases real estate for use as his home and the purchase price is not more than $300,000.  However, buyers should be aware that while they may meet the withholding exemption they are still responsible for the seller’s tax liability, interest and penalties should the seller not file a US income tax return to report the sale and pay any relevant taxes.

Note to Non-Resident Buyers – If you purchase property from a non-resident seller and an exception to FIRPTA withholding does not apply then you must ensure that FIRPTA is satisfied as part of the closing.  Check your settlement statement prior to closing where you should see 15% of the sales price withheld on the seller’s side of the settlement statement.  Request a copy of the withholding certificate from the closing agent and, if withholding was calculated, request a copy of forms 8288, 8288-A and front and back of cancelled check.  Retain these documents in a safe place along with your settlement statement and other closing documents.

Foreign Investment in Real Property Tax Act (FIRPTA) Withholding

U.S. Tax law requires that a non-resident alien who sells an interest in U.S. real property is subject to withholding, for tax purposes, of 15% of the gross sales price (i.e. $45,000 on a property with a sales price of $300,000). The withheld amount is required to be forwarded to the IRS, by the Closing Agent, within 20 days of the date of closing. These funds are held until the IRS is satisfied that all taxes due by the non-resident are paid. In order to apply for a refund you can either:-

File U.S. tax returns for each year that rental income was received, reporting all income and expenses; file a final U.S. tax return in the year following the year of sale, to report the sale and recover the balance of cleared funds. This process can take up to eighteen months depending on when, during the tax year, the property is sold.

File prior year tax returns (where required) plus an application for early release of cleared withholding on or before the date of closing. By making this submission, the 10% withholding remains with the Closing Agent whilst the IRS processes the Withholding Application and issues a Withholding Certificate for the cleared funds – usually around 90 days.

Please note that applying for and receiving a Withholding Certificate does not eliminate your requirement to file a final U.S. income tax return to report the sale transaction. In fact, when your final tax return is filed you may receive a further tax refund depending on the number of owners and length of time that the property was held.

In order to ensure a timely release of your funds it is extremely important that the following is obtained PRIOR to closing:-

Buyer’s names, address and SSNs – if U.S. Citizens

Buyer’s names, address and ITINs – if non residents

Or, if the buyers are non residents and do not have ITINs, the buyer’s completed Form W-7 (one per buyer) and authenticated copy of the picture page of their passport(s)

Without this information the Application for a Withholding Certificate and early refund will be rejected. We suggest that you request your Realtor prepare your sales contract contingent upon the buyers providing the above information.

Who’s responsible for FIRPTA withholding on the sale of U.S. property?

Foreign Investment in Real Property Tax Act (FIRPTA) was established in 1980 to ensure the withholding of estimated amount of taxes which may be due on the gain from the disposition or transfer of a U.S. real property interest from a foreign person.

If you purchase U.S. real property from a foreign individual or corporation then you are required to make sure that the seller pays any taxes due on the property.  The buyer must execute or have executed the correct forms including the sellers name, address and social security number or individual taxpayer identification number.  15% of the gross sales price must be withheld and submitted to IRS or held in escrow whilst an application for reduced FIRPTA withholding is timely filed and processed.

If the buyer does not take care of the withholding and the seller is a foreign entity who leaves without paying their tax then 15% will be taken from the buyer.

Most buyers are unaware that it is their responsibility to determine if the transferor/seller is a foreign person and subject to FIRPTA withholding.  In reality, the settlement agent (Title Company or Attorney) may be instructed to deduct the 15% and submit to IRS or hold in escrow whilst an application for reduced FIRPTA withholding is submitted to IRS for processing.

How To Invest Your IRA In Real Estate

IRA Investment Strategies

IRA Investment Strategies

IRA Investment Strategies

There are several advantages of using a self-directed IRA or Solo 401(k) plan to buy real estate. The first is tax deferral or tax-free growth. For example, if one purchased a piece of property with retirement funds for $80,000 and later sold the property for $300,000, the $220,000 of gain appreciation would generally be tax-deferred. Whereas, if you purchased the property using personal funds (non-retirement funds), the gain would be subject to federal income tax, and in most cases, state income tax. Second, a self-directed IRA can allow you to invest in hard assets you know and understand, such as a rental property or piece of land. Lastly, having the ability to invest in alternative assets is believed to be a good source of investment diversification.
Real Estate Investment Trusts (REITs)
If you are looking for easy transactions both in and out, REITs provide that. Many REITs are registered with the SEC and are publicly traded on a stock exchange. These are known as publicly traded REITs. Others may be registered with the SEC but are not publicly traded. These are known as non- traded REITs (also known as non-exchange traded REITs).
All REITs have their own specialties, so make sure you do your due diligence on the company. REITs are required to distribute 90% of its taxable income as dividends, so many retirees look to REITs for income.
Rental Properties
You can also invest in rental properties. You can buy distressed properties, rehabthem and rent them out or you can buy performing ones. If you decided that you want to go the distressed route you’ll have to keep a very close eye on the accounting. There are lots of rules in regards to tracking the money. You can either manage them on a daily basis or go through the process of hiring a property manager to manage it for you. This is a good way to build a passive income stream.
Turnkey Real Estate Investment
Turnkey is another viable option for SDIRA owners. Self-directed IRA (SDIRA) is another option for an IRA holder, which allows them to invest in diversified assets. To expand on “diversified assets,” this means that you aren’t restricted to stocks and bonds like most IRAs. You are able to invest in many different things. SDIRA serves as a savings account where your money can grow tax-free until you withdraw the funds, unless it is a Roth IRA. If it is a Roth IRA, the money is taxed prior to going into the account and when it is withdrawn, it is tax-free.
The owner simply transfers funds from his/her IRA or other retirement account to SDIRA. Many of them increase the amount invested with their personal contributions to the account.
A Turnkey Real Estate investment basically means that you are working with a turnkey investment company that are selling rental properties. Most of these investment properties are already rehabbed and rented out. You just need to buy the property and everything else in managed by the turnkey company. This is the best option for out-of-state investorsor someone who’s not interested in buying, rehabbing or managing the property. You’ll get the rent every month and you’ll pay a portion of that to your turnkey company for managing the properties. It is a easy hands off approach to investing in real estate.
Make sure to do your research properly in order to find the right turnkey investment company.Pay them a visit, check the property in person and invest once you’re satisfied.
You may have noticed that fix and flip is not on this list. And there is a big reason for that. The idea behind an IRA is that it is a retirement account, not a business account. If you start conducting business in your IRA, it can open you up to tax liabilities.

Key Trends Home Buyers Should Watch in 2019

2019 Real Estate Market Trends

2019 Real Estate Market Trends

2019 Real Estate Market Trends

It’s a time to look ahead, to make new plans, to achieve new dreams. If those dreams include buying your own home, you should keep an eye on the ever-changing tides of the housing market. Now, markets are like the weather: You can’t entirely predict how they will act, but you can get a sense of the forces that will push things in one direction or another.
There will be more homes for sale, especially in luxury markets
There has been a tight inventory of homes for sale for several years now and homes have been hitting the market, but not enough to keep up with the demand. Nationwide, inventory actually hit its lowest level in recorded history last winter, but this year it finally started to recover. Inventory growth is expected to continue into next year, but not at a blockbuster rate—less than 7%. This is welcome news for buyers.
Affording a home will remain difficult
Life is also going to be more difficult for home buyers, because mortgage rates are expected to continue to increase, as well as home prices, so the pinch that buyers are feeling from affordability is going to continue to be a pain point moving into 2019.
Mortgage rates, now hovering around 5%, are projected to reach around 5.8% by the end of 2019. That means the monthly mortgage payment on a typical home listing will be about 8% higher next year. Meanwhile, incomes are only growing about 3% on average. That double whammy is toughest on first-time home buyers, who tend to borrow the most heavily and who don’t have any equity in a current home to draw on.
Millennials will still dominate home buying
Just a few years ago, Millennials were the new kids on the block, just barely old enough to buy their own homes. Now they’re the biggest generational group of home buyers, accounting for 45% of mortgages (compared with 17% for baby boomers and 37% for Gen Xers). Some of them are even moving on up from their starter homes.
At the time of last year’s forecast, the GOP’s proposed revision of the tax code was still being batted around Congress. While there was talk that it might discourage people from buying a home, no one really knew how it might affect the real-estate market.
This year … well, we still don’t really know. That’s because most taxpayers won’t be filing taxes under the new law until April 2019. And while some people might have a savvy tax adviser giving them a better idea of what’s in store, for many, the reality check will come in the form of a bigger tax bill—or a bigger refund.
Renters are likely to have lower tax bills, but might not be tempted to buy while affordability remains a challenge, and with the new, increased standard deduction reducing the appeal of the homeowner’s mortgage-interest deduction.
“I think the new tax plan will affect mostly homeowners and home buyers in the upper parts of the distribution,” says Andrew Hanson, associate professor of economics at Marquette University in Milwaukee, WI. “Those who either own or are buying higher-priced homes are going to pay a lot more.”
The biggest change resulting from the new tax law, Hanson predicts, will be in mortgages, since people will be less inclined to take out large mortgages.

Tax Considerations When Deciding to Relocate.

Florida retains its ranking as one of the nation’s lowest-tax states, according to the latest study released by Florida TaxWatch. Out of 50 states, Florida ranks No. 42 in the average amount of money paid by residents.
Florida TaxWatch findings:
  • Floridians pay an average $5,679 per person in state and local taxes
  • Residents pay an average $2,584 in state taxes – one of the least amounts nationwide. Only the residents of one other state pay less.
  • However, local tax burdens are higher. “Per Capita Local Tax Collections” ranked No. 27 nationally.
  • In the balance between state and local taxes, Florida relies more heavily on local revenue than almost all other states and is No. 2 nationwide. Local taxes account for 53.3 percent of the total.
  • With property taxes, Florida ranks a solid “average” score – No. 25. The state’s per capita property tax ranking is right at the median – 25th.
  • Florida also classifies 38.7 percent of its state and local revenue as non-tax revenue (such as “fees”) – the 7th largest percentage in the nation.
  • Florida relies more heavily on transaction taxes, such as general and sales taxes. They make up, 81.5 percent of all state tax collections compared to the national average of 47.2 percent.
  • Florida has the highest state and local selective sales (excise) taxes on utilities in the nation. The tax on motor fuels is No. 15; the tax on alcoholic beverages is No. 19.
  • Florida’s housing sector produces significant revenue, and the state’s documentary stamp taxes are rising rapidly post-recession. It collected an average of $276 per capita in 2006, $72 in 2009, and $130 per capita in 2016 – the nation’s second-largest doc-tax burden.
  • Florida is one of seven states without a personal income tax. The average state relies on personal income taxes for 37.0 percent of its tax revenue.
  • Businesses pay 51.7 percent of all Florida state and local taxes – the 12th highest percentage in the nation.

Tax Deductions to Take in 2017 Before They Disappear

As you’ve no doubt heard, the U.S. tax code got an overhaul—so what does that mean for the 2017 return you’re filing right about now? It means that this is your last chance to take advantage of tax deductions from the old tax code.
Here is a rundown of four major tax breaks that are disappearing after this filing year, and how to take full advantage of them for 2017.
Home Office Deduction
With the increasing popularity of telecommuting and working from home, the home office tax deduction is one that many people opt to take. If you’re full-time self-employed, this deduction will continue in 2018. But for all you office workers who work in your “home office” on the occasional Friday? The gig is up.
“In 2018, for non-self-employed people, the home office deduction is going away entirely,” says Eric Bronnenkant, CPA, CFP, and Betterment’s head of tax. If you are a W-2 employee this is the last year you will be able to take advantage of the home office deduction. The home office deduction falls under what’s called “miscellaneous deductions,” and includes business expenses that are not reimbursed by your employer. Miscellaneous deductions can’t exceed 2% of your adjusted gross income, but if you meet the requirements, you can take the deduction in 2017.
Unlimited property tax
One of the biggest changes for homeowners in the new tax bill is the cap on deducting property taxes.
In the past all property taxes were tax-deductible. Yet going forward in 2018, the maximum you can deduct is $10,000, and that includes state and local income tax, property tax, and sales tax.
That means if you pay more than $10,000 a year between your state and local income taxes, property tax, and sales tax, anything exceeding that amount is no longer deductible. For your 2017 return, make sure every penny you pay in property taxes is deducted, along with your state and local taxes—or, if you’re in a state without income tax, a portion of the sales tax you paid.
Moving expenses
If you moved in 2017, lucky you: You’re the last to take advantage of the ability to deduct your moving expenses, provided your move meets certain requirements (e.g., your new job is at least 50 miles farther away than your old job was from your old home).”Previously, people could deduct all the expenses associated with [relocation] moving,” says Priya Mishra, the managing attorney at Top Tax Defenders. “This will now be gone.”
The only exception going forward, according Patrick Leddy, a tax partner at Farmand, Farmand, and Farmand LLP, will be members of the armed forces. So if work took you to a new locale last year, don’t forget to dig up your receipts and deduct those moving expenses.
Interest on a home equity loan for non-home improvement purposes
A home equity loan is money you borrow using your home as collateral. This “second mortgage” (because it’s in addition to your original home loan) often takes the form of a home equity loan or home equity line of credit (HELOC). Traditionally, the interest on these loans could be deducted up to $100,000 for married joint filers and $50,000 for individuals. The best part? You could use that money to pay for anything—college tuition, a wedding, you name it.
But starting in 2018, home equity loan interest is deductible only if it’s used for one purpose: to “buy, build, or improve” your home, according to the IRS. So if you’re dying to update your kitchen or add a half-bath, you’ll get a tax break from Uncle Sam. But if you want to tap your home equity to go to grad school, well, that’s on you.
More bad news: Unlike the mortgage interest deduction where loans taken before 2018 could be grandfathered into the old laws, old home equity loans have no such exemption. People with existing HELOC debt take the hit just like homeowners applying for one now.
But there is one small loophole: To reclaim this deduction, you could refinance your second mortgage and your first into a new mortgage that lumps together both debts. This essentially turns your HELOC into a regular mortgage, which means that you can deduct that interest. Just remember that refinancing can be costly, and that this new loan will be subject to the new, smaller limits on deducting mortgage interest. In loans originating on or before Dec. 14, 2017, that limit is $1 million. On loans made after that point, the cap is $750,000.
Will I owe more taxes next year?
Worried about losing all of these deductions? Though the new tax plan is drastically changing how most people will file their taxes, it doesn’t necessarily mean that you will end up owing more. Limits on mortgage interest deductions may be dropping, but so are the tax rates for most income groups. While the amount of property tax you can deduct is shrinking, the standard deduction is growing. So, it may all balance out.
The most important thing to do, after making sure you’ve grabbed all of the tax deductions you can for 2017, is to sit down with your accountant or financial advisor and size up where the new tax laws leave you.That will give you plenty of time to prepare for 2018 taxes and beyond.