If you are a Foreign National, before you purchase your winter get-away spot, you would be well-advised to understand the differences between foreign and U.S. home buying processes, as well as the tax implications of owning a second home in South Florida.
Qualifying to Buy
Since it is more difficult to track down foreign nationals in case of a mortgage default, Florida lenders require more up-front evidence of financial stability from their foreign national buyers. Some lenders require that buyers place closing costs plus 12 months of principal, interest, taxes, and insurance (PITI) in a U.S. bank account. They may also require foreign nationals to put more money down, as much as 25-30% and demonstrate that they have liquid reserves available to cover three to six mortgage payments. Financing and closing costs begin the loan pre-approval process before you begin searching for a home or condo in Florida. In this way, when you find that dream second-home you have been searching for, you will be negotiating the price with the seller from a position of strength. The seller will know upfront that you are fully prepared and “qualified” to buy. Expect the length of your mortgage loan to differ from what you may be used to. For example, rather than the Canadian standard of one to ten-year mortgages, U.S. mortgages are typically written for 15 or 30 year terms. Many of the popular types of mortgages available to foreign nationals buying in Florida will generally be familiar to buyers in their home countries, particularly the basic fixed rate and adjustable (variable) rate mortgages. However, there are many variations on these themes that have no real foreign national mortgage equivalents. There is also a wide range of programs and offers that are really only suitable for special case USA citizens. While at first glance, there appears to be enough similarities in terminology to make Foreign Nationals buying property in Florida think that the mortgage system will be quite easy to find their way round and similar to the process of buying a property in their home country, because the process seems so similar many assume that they can put that Foreign National Mortgage process to one side for the moment and concentrate on finding a great South Florida property at the right price. Foreign National Mortgages work differently when financing property in Florida. The one thing that every foreign national citizen buying in Florida must remember is not to make assumptions about how mortgages work in Florida. Many of the differences may be minor, but others might just make the difference between a successful purchase and a non-productive purchase. You should work with a specialist in order to secure a foreign national mortgage to avoid the potential for disaster. It may take more time to complete a real estate sale in the U.S. Be prepared to wait three to five weeks or more to close on your Florida real estate property once you have a signed purchase contract. During that period, all of the third-parties involved (inspectors, appraisers, insurance companies, title companies, etc.) will be conducting their portions of the transaction.
Minimizing Taxes & Protecting Your National Health Benefits
Even though you are a citizen of another nation, you may be treated as a U.S. citizen for tax purposes if you spend too much time at your Florida get-away. In general, limiting your time in Florida to less than six months each year minimizes your tax implications and may not compromise your national health care benefits. If you rent your Florida property for the portion of the year that you spend in your own country, you will need to file a federal U.S. income tax return and declare your rental income, but you may be able to deduct expenses such as maintenance, utilities or mortgage interest. Since Florida doesn’t have a state income tax, income from the property will only be taxed by the federal government.
Be aware that non-residents of Florida do not get all of the property tax advantages granted to permanent residents of Florida, so be sure to inquire as to the difference this will make in your on-going costs. Again, a competent Realtor can explain these restrictions to you.
Property insurance in Florida can be expensive. One way to limit this is to look for properties built after the most recent set of building code updates, mandating that structures will be able to withstand higher winds. Insurance companies charge less to insure properties that meet the latest code requirements. Homes and condos that are not located directly on or adjacent to the waterfront or in designated “flood zones,” cost less to insure.
Avoiding Estate Taxes and Probate
Foreign nationals can reduce their exposure to U.S. estate taxes. For example, one of the best ways is by placing a non-recourse mortgage against the property. A non-recourse mortgage gives the mortgage-holder recourse only against the property, itself, not against any other assets of the borrower. The probate process of transferring property to beneficiaries can be lengthy and costly. Putting the deed to your Florida home in the name of a Cross Border Revocable Living Trust (CBRLT) rather than in an individual’s name may offer several advantages. Properties held by a CBRLT are exempt from Florida probate and thus have no filing requirements for U.S. There may be other benefits under U.S. or your own country’s rules to avoid estate and probate costs. Check with a Florida-based attorney to see what benefits may be available to you. We can help you identify a competent attorney who deals with cross-border property investments.
FIRPTA (The Foreign Investors in real Property Tax Act)
Basically, the US Government wants to collect the tax due on any net gain in the sale of your US asset. Toward this end there is FIRPTA which requires the Seller to withhold a portion of the proceeds to you and transmit it to the IRS pending your completion of a tax return. For more detailed information, please refer to the IRS page on FIRPTA.
In summary, as a foreign national considering buying a home or condominium in Florida there are things you need to understand. Nonetheless, there has never been a better time to buy that seasonal or second home you’ve been dreaming about.