What Taxes Are Required When Buying a House in the U.S.? What is FIRPTA?

Question

1.1 What taxes do foreigners need to pay when purchasing a home in the United States?

AIAIGAnswer

During the purchase phase, foreign buyers are subject to the same tax system as local U.S. residents, but there are significant differences between states. Mainly includes:

1. Transfer Tax
- Levied as a certain percentage of the home's transaction price;
- Rates vary greatly by state and city, for example, up to 1.425% in New York City, and about 0.7% in Florida.

2. Recording Fees
- Fees paid to the local recording office for title registration, generally ranging from a few hundred to a few thousand dollars.

3. Attorney Fees and Title Insurance
- U.S. real estate transactions are typically secured by attorneys and title insurance companies for legality;
- Fees account for about 0.5%–1% of the home price.

4. Home Inspection and Appraisal Fees
- Required when purchasing with a loan, usually $300–$1,000.

Conclusion: Total additional costs during the purchase phase are generally 3%–5% of the home price, with no difference between overseas buyers and local buyers.

1. Property Tax
- Collected by local governments, paid annually;
- Tax rate is about 1%–2%, based on the assessed value of the property;
- For example: about 1.1% in California, about 2.1% in Texas, and about 1% in Florida.

2. Home Insurance Premiums
- Mandatory expenses, about 0.2%–0.5% of the home price annually.

3. Property Management and Maintenance
- If used for rental, it should be included as operating expenses and can be deducted when filing taxes.

Tip: Property tax is usually the most important part of holding costs in the U.S., and tax rates vary greatly by state.

Yes, but it depends on the situation:

- U.S. resident buyers: Can deduct mortgage interest up to a certain limit (after the Tax Cuts and Jobs Act, the cap is interest on loans up to $750,000).
- Foreign buyers (non-tax residents): If the property is rented out, mortgage interest can be deducted as a business expense against rental income; if for personal use, it cannot be deducted.

Summary: Mortgage interest on investment properties can be deducted, but not for primary residences.

Foreigners renting out U.S. property must pay federal income tax, and depending on the state, state tax. Two methods:

1. Net Income Reporting (Net Basis)
- Tax is paid on net profit after deducting costs;
- Deductible items include mortgage interest, depreciation, property fees, insurance, etc.

2. Gross Income Withholding (Gross Basis)
- The tenant or property management company directly withholds 30% tax and remits it to the IRS;
- Applies to non-residents who do not actively report.

Recommendation: Long-term investors should choose net income reporting to effectively reduce tax burden.

The U.S. allows foreign investors to depreciate the structural value of a property (excluding land) for tax deductions:

- Depreciation period for residential rental property: 27.5 years;
- Commercial property: 39 years;
- Each year, a portion of the value can be deducted as a "cost," reducing taxable income.

For example: A house valued at $500,000 (with the building portion at $400,000) can be depreciated by $14,545 annually, significantly lowering the income tax base.

Yes. Non-resident landlords must file taxes with the IRS annually by submitting Form 1040-NR.

- If rent is collected through a property management company, they must withhold 30% and remit it;
- If renting out on your own, you must actively report taxes and pay net income tax;
- Failure to report may result in IRS back taxes and penalties.

Professional advice: Hire a CPA familiar with foreign taxpayer matters to file annually.

FIRPTA (Foreign Investment in Real Property Tax Act) is a U.S. tax withholding mechanism specifically for foreign individuals selling real estate.

- When the seller is a foreigner, the buyer must withhold 15% of the sale price and remit it to the IRS;
- This is not the final tax amount but a withholding tax; the final amount is based on the seller's reported capital gains, with any excess refunded or deficiency paid;
- Purpose: To prevent foreign sellers from leaving the country without paying taxes after selling property.

1. The seller and buyer sign a purchase contract;
2. The title company or attorney confirms whether the seller is a foreigner;
3. If so, 15% of the closing price is withheld and remitted to the IRS;
4. The seller submits Form 8288-B during tax season to calculate the actual tax liability;
5. The IRS refunds any over-withheld amount within 3–6 months.

Common practices:

- If the sale price is below $300,000 and the buyer intends to use it as a primary residence, FIRPTA withholding can be exempted;
- The seller can apply in advance for a Withholding Certificate (Form 8288-B) to reduce withholding based on actual profits;
- Using a U.S.-registered company or trust to hold the property can reduce the risk of being classified as a 'foreign seller' (requires guidance from a tax advisor).

- Determine the structure before purchasing (individual name vs. company holding);
- For long-term rentals, declare net income mode and reasonably utilize depreciation;
- Plan FIRPTA application at least six months in advance before selling;
- If holding multiple properties, establish a U.S. LLC to simplify management and protect privacy.

Some states in the U.S. have no state income tax, such as:
- Florida
- Texas
- Nevada

Relatively high-tax states include: California (high property tax), New York (high state tax). Investors can optimize asset allocation based on tax burden.

The U.S. real estate tax system is complex but logically clear:
- Pay transaction tax when buying;
- Pay property tax and income tax during the holding period;
- FIRPTA withholding when selling;
- Legal tax savings can be achieved through structural planning.

Professional CPA support and advance planning are key to avoiding heavy taxes from eroding profits.

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