When representing either the buyer or seller in a real estate transaction involving an individual who is not a U.S. citizen, attorneys and real estate agents need to be aware of some critical issues that can have a significant impact on the ability to conclude a sale and the timeline of that sale. U.S. laws allow non-citizens to purchase both residential and commercial real estate of all types, but restrictions can apply in some situations. In addition, it is important to be aware of requirements regarding loans, the transfer of funds, and tax issues. Immigration status can affect the rental of property as well, so attorneys working with lease transactions also need to be cognizant of potential challenges.
No Visa Requirements
While temporary nonimmigrant visas such as the B-1 business visa or B-2 tourist visa come with many restrictions on actions that are allowed by visa holders, those restrictions do not limit the ability to purchase real estate. Non-citizens are free to buy a home either for their own use or as an investment. They can purchase commercial property without holding any type of visa whatsoever. Quite a few property owners in the U.S. do not have legal immigration status at all. However, these property owners are at risk of removal proceedings, and ownership of property in the U.S. does not convey any advantage when it comes to immigration status. Many foreign property owners use their property while in the U.S. on a visitor visa and then rent it to others when they return to their home countries.
Not only does a foreign buyer not need a visa, they also do not need a Social Security number. However, non-citizens without a Social Security number may need to obtain an Individual Taxpayer Identification Number (ITIN) from the IRS to obtain a mortgage or sell their property.
Financing Can Be a Challenge for Foreign Buyers
Often the biggest challenge in the purchase of real estate for non-citizens is obtaining a mortgage or other financing. Banks often impose strict requirements that can make financing very difficult. Buyers based out of the country may need to put down a much greater downpayment, pay higher interest rates, and supply copious amounts of documentation to qualify. Some buyers have more success obtaining financing through financial institutions in their home country so that they can make a cash purchase in the U.S.
Tax Considerations
Tax liability associated with property ownership, rental, and sale can be difficult enough for U.S. citizens to manage, and these issues take on added complexity when a property owner is not a citizen. Remember that all real estate transactions—or just the ownership of real property—can invoke tax implications at the federal, state, and local level. It is essential to accurately calculate and pay property taxes, income tax on rental earnings, and capital gains tax on proceeds. Property owners may also need to pay tax on depreciation recapture and families often face estate tax consequences.
Individuals who are not U.S. citizens are often taxed at a different rate and sometimes at different times than citizens. For instance, the Foreign Investment Real Property Tax Act, often referred to as FIRPTA, requires the automatic withholding of 15% of the gross sale price for submission to the IRS. If a foreign seller calculates that their tax liability on the transaction will be less than 10% of the gross sale price, they can request the IRS to reduce the withholding amount. The withholding requirement applies to any “disposition” of property by a “foreign person,” which includes gifts, exchanges, and transfers.
Although the IRS allows an exclusion on capital gains tax on the sale of a primary residence, a non-citizen who does not live in the U.S. most of the year may not be able to satisfy the residency requirement to take advantage of the exclusion.
State Restrictions on Foreign Ownership
While federal immigration law does not restrict property ownership by non-citizens, some lawmakers at the state and federal levels have become concerned about the foreign ownership of real estate, particularly agricultural properties. This has prompted several states to adopt restrictions on the sale of land to individuals or businesses from foreign countries. Rural land in proximity to military installations is often restricted, for instance.
In Florida, lawmakers and the judiciary have clashed about restrictions on property ownership by those from “foreign countries of concern,” and the issue remains unsettled. The bottom line is that it is important to pay attention to state and local restrictions that could affect a sale or lease transaction, looking not only at statutes but also regulations and judicial interpretations.