In an earlier post, we covered the intricacies of buying property in NYC as a foreigner. As outlined, there are few obstacles to foreign investment in NYC real estate. Unlike many popular cities in the U.S. and worldwide, there are no special taxes levied on foreign buyers. However, this changes if you choose to sell or should you pass away. If you’re excited about moving to NYC or looking to invest, don’t start before first understanding the FIRPTA tax, Capital gains tax and estate tax.
What is the FIRPTA tax?
The Foreign Investment in Real Property Tax Act (FIRPTA) requires that any person who buys U.S. real property from a foreign seller must retain 15% of the gross purchase price. Once the IRS has determined that you are current on all taxes owed to the U.S. government, this will be refunded. The costs of compiling with the FIRPTA can be quiet substantial for foreign sellers. Once all legal, accounting and filing fees are added up, you can find yourself with a five-figure USD bill. But with 15% of the gross sale price on the line, it would be worse not to.
However, with some planning, the FIRPTA withholding can be reduced or even eliminated. Foreign buyers should apply ahead of time by filing for an 8288-B Application for Withholding Certificate. This will reduce the FIRPTA amount at the time of closing. Many things go into determining the amount it can be reduced by, such as original purchase price, length of ownership, capital improvements, closing costs and the location of the seller’s residency. When scheduling a closing date for your sale, foreign buyers should keep in mind that it takes approximately 90 days for the IRS to process an application for a Withholding Certificate.
There is no withholding required for U.S. citizens, permanent resident, and resident aliens. You can be classified as a resident alien if you meet the physical presence test of being present in the US for a minimum of 183 days in the current calendar year. Or the substantial presence test of being present in the US for an average of 183 days over three years.
It’s also possible to avoid the FIRPTA Withholding if the purchase price of the property is under $300,000 and the buyer has signed an affidavit stating that they intend to use it as their primary residence.
What is the capital gains tax?
There is both a State and Federal Capital Gains Tax on the net capital gains from foreign owner property sales in NYC. Currently, the Federal Capital Gains tax is 20% while New York State imposes a non-resident gains tax of 8.82%. Your net capital gains are calculated by adding your original purchase price, closing costs for both purchase and sale and the cost of any capital improvements together. This cost basis is then subtracted from your sale price.
What is the estate tax?
In the event of the owner passing away, and the property is valued at over $60,000, both the Federal government and New York State impose an estate tax on the value of the property at the time of death. For foreign owners, this can be very high with a 40% tax by the Federal government and up to 16% tax by the State.
However, foreign buyers can minimize this, along with the income tax, by structuring their U.S. holdings through a foreign trust or business such as a corporation or limited liability company.