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1031 Exchanges and Foreign Investors

Long Beach and the West Coast are considered desirable areas for property. Please find an easy property search area below. If you buy or sell property in the United States, you should know about foreign ownership of residential real property.
 
In 1980, the United States government implemented the Foreign Investment In Real Property Tax Act, known as FIRPTA. This requires investors who own real estate inside the United States but who reside elsewhere to pay taxes on any gains realized from the sale of a US property.

The tax rates are the same rates applicable to U.S. citizens. For example, if an investor is a nonresident and the real estate qualifies for long term capital gains treatment (the property was owned for more than one year), the gain will generally be taxed at a rate of 15% at the federal level.

To ensure collection of taxes, FIRPTA requires withholding for properties over $300,000 based on the sale price of the property. Instead of paying the full amount to the foreign seller, the buyer of the property is obligated to withhold, as of 2/16/2016, either 10% or 15% of the purchase price of the property and send it directly to the IRS. And, California law requires 3-1/3% withheld.

For example, the sale of a $1M apartment building by a foreign seller will result in a $100,000 withholding. The amount of the seller's gain is irrelevant. The withholding is treated as an advance payment against the actual taxes owed. The foreign seller will need to file a US tax return for the year the sale occurred and the final tax obligation, or refund, will be determined by crediting the withholding amount against the tax shown on the return.

Foreign sellers can defer the payment of taxes and avoid withholding on the sale of an investment property by conducting a 1031 Exchange. However FIRPTA rules impose additional requirements in order to avoid the withholding by submitting additional information to the escrow company.
 
Foreign investors considering selling and conducting a 1031 Exchange should plan to obtain an ITIN well before selling the property (8-10 weeks) and apply for a withholding certificate as soon as a buyer is found for the property.
 
The foreign buyer should obtain information concerning U.S. tax residency, income taxes, estate and gift tax, how to take title, in addition to the FIRPTA information above.   
For more information, please contact me directly.

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