FIRPTA And Its Effect On Quick-turn Real Estate
I am moving to the USA from NZ in two weeks with the aspirations of quick-turning/wholesaling real estate. I have just discovered FIRPTA withholding tax for non-resident investors and am a bit concerned to say the least. To have to part with 10% of the total sales price would kill any potential deal, so I was hoping somebody could shed some light on this for me. Does it apply to every real estate transaction regardless of its nature when I am involved in the selling process? Any help would be greatly appreciated.
Jamie from NZ
Jamie,
US citizen must pay US income tax on their worldwide income no matter where they reside. The idea behind the withholding is that Non resident aliens (not a us citizen and don't reside in US) would not pay any US tax since they on not located in the country.
I don't think that you are subject to the withholdng if you are a US Citizen living abroad.
You should consult competent counsel.
-Adam
Jamie:
I am a tax lawyer and I do real estate tax work for nonresidents daily for a living. Here's the deal.
If you're going to be a U.S. resident for income tax (the "right" kind of visa or enough days of presence in the U.S. in a calendar year) you don't have to worry about FIRPTA withholding--it doesn't apply to U.S. residents, regardless of citizenship.
But if you're here on a tourist visa and you limit the number of days you're here in the U.S., then you DO have a FIRPTA withholding problem.
The 10% withholding applies to your calculated tax liability. You're obliged to file a tax return and pay any excess tax due, or (you hope) get a refund.
If your deals are big enough to warrant some tax-planning overhead, you can set up structures to eliminate FIRPTA withholding. But I'd say you have to be doing $2M plus deals to make it worth your while.
There's a lot more to the picture for you. E.g., there's a tax treaty between the U.S. and N.Z. to look at. And don't forget that you'll pay State income tax if you settle in a State like California. (California has a FIRPTA-like withholding requirement for nonresidents, too).
Most importantly, however, consider U.S. estate tax. If you buy a boatload of U.S. real estate and fall over dead, you're at risk of paying estate tax at perhaps 48% of the value of what you owned when you died. Well, you won't pay it because you'll be dead. But your heirs will be miffed. You can and must structure your affairs to eliminate this.
Nevertheless, U.S. taxes are manageable and the bottom line is that you'll be taxed almost exactly like all of the U.S. real estate investors who post to this forum.
Good luck!
Phil Hodgen
Pasadena, CA
Hogen has lined it out. In California the escrow in the transaction will withhold unless you can satisfy the residential requirement.
One way is the establishment of a trust which is resident in the state and it holding title to all of your goodies, can then close an escrow and accept a closing check to it. Now that is the common practice among those who come and go and belong to no nation or state, or are in the process of changing.
There are some very good attornies in these here States that can construct an entity and guide you through the hurdles.
Sometimes the trusts have many members from all over the world. When paying out to its members upon a profit it is a little tricky. But fun.
You have a firm in New Zealand that is doing some great treatments converting ISO containers into houses. Bring some of their stuff with you. Might be profitablle.
Lucius
jamie,
File a partnership or corporation, I believe they are exempt from RE witholding in Cal.