Certainly. The State of Florida does not impose any restrictions on the nationality of the property purchaser. You can purchase a real property as long as you are over 18 years of age.
In tax law, the word “foreigner” refers to people other than U.S. citizens, U.S. resident aliens (green card holders) and U.S. residents for tax purposes (foreigners who reside in the U.S. for 183 days or more each year). Taxes involving real estate investment include property tax, tax on rental income if leased, tax on capital gains (if any) upon sale, and transfer tax at the time of title transfers.
Property tax is levied upon all property owners by local governments at the county, city and town levels. Whether you are a U.S. citizen, a resident alien or a foreign resident, you will need to pay property tax each year. The amount of the property tax can be substantial. It is a major part of your total expenses on the property. Investors are advised to find out the amount of the property tax before making a purchase.
Income tax on rental income is paid by foreign investors on the rental income of their rental properties. There are two types of rental income taxes – business income tax and investment income tax. If a foreign investor does not actively participate in the rental business and property management other than collecting rents, the rent is considered investment income. Property management companies retained by a foreign investor must withhold 30% of the rental income (not rental profits) and make payment of estimated tax on behalf of the property owner. This is called the Gross Income Method. If the property manager fails to withhold and make payment of the estimated tax, the Internal Revenue Service (the “IRS”) can come after the property manager for taxes owed by the foreign investor as well as penalties and interest. The IRS can even bring legal action against the property manager. The Gross Income Method can impair a foreign investor’s cash flow. If the investor actively participates in the property management, then there is no need to withhold tax. The investor will just need to pay taxes on the net income after deducting all associated costs and expenses from the gross rental income. This is called the Net Income Method. A foreign investor must estimate profits and pay estimated tax on a quarterly basis, and at the end of the year files a tax return to report the actual gain or loss as well as pay additional tax owed or request a refund of overpayment. The IRS permits a foreign investor who earns only investment income to elect not to have tax withholding by filing Form W-8ECI.
Income tax on capital gains in levied on capital gains earned upon the sale of a real property. If a property was held for less than one year at the end of the sale, the 10% to 35% tax bracket will apply. If the property was held for more than 12 months, the long term capital gain tax rate of 15% will apply. To prevent foreign investors from tax evasion, the law requires that the buyer, when purchasing a property from a foreigner, must withhold 10% of the total sales proceeds and files Form 8828 with the IRS within 20 days of the closing. The buyer will then provide the foreign seller with a copy of the Form 8828 as proof of tax withholding. If the buyer fails to withhold the tax, the IRS will require the buyer to pay the tax owed by the seller and pay a penalty of up to $10,000. The buyer is exempt from the tax withholding obligation only if the property purchased was to be used as the buyer’s primary residence and the price was under $300,000. In the year following the sale, the foreigner seller must file Form 1040NR with the IRS, report the capital gains on the property transaction of the previous year and attach a copy of the Form 8828 as proof of tax withholding. If the tax withheld exceeds tax owed, the foreign investor will receive a refund of the overpayment. If the tax withheld was less than tax owed, the investor will pay additional tax. In addition to Federal income tax, most states impose a capital gain tax. However, Florida does not impose income tax. Most other states also impose a transfer tax at the time of real estate transactions. In Florida, this is called Doc. Stamps on Deed. The buyer pays 0.7% of the sales price for stamp tax. If the buyer takes out a mortgage for the purchase, he or she will need to pay additional 0.35% of the mortgage loan amount as doc. stamps on note.
For short term rental properties, the investor also needs to pay a sales and tourist development tax, which is 13% of the monthly rental income.
Disclaimer: We are not certified public accountants or tax attorneys. The above descriptions of various types of taxes are meant as brief guidelines for investors in Florida real properties. They should be not relied upon as tax advice for making investment decisions or for fulfilling tax responsibilities. Investors are advised to consult a tax professional for tax related matters and questions.
Not true. There is no difference in taxing regardless of your nationality if the property involved is an investment property. U.S. residents will have the benefit of homestead exemption if the property purchased is for primary residence, and each U.S. family can only claim one property as their primary residence.
Our Multi-Choice Management LLC was established for this purpose. There are other property management companies in Orlando that you can choose to use. For a list of services provided by Multi-choice Management LLC, please refer to the “Property Management” Section on this website.
Investors must bear the expenses of property taxes, homeowners insurance premiums, homeowners association fees, property management fees and maintenance costs. For short term rental properties, there are also expenses for water, electricity, gas, cable television, telephone, internet access, pool and lawn maintenance, rental advertising, business license application fees, booking agent commissions, business and tourist development tax, etc.
Rentals can be long term or short term depending on its lease term. Long-term rental must have a lease term of at least seven months, with most long term rentals being one-year, renewable at the end of each lease term. Tenants who sign long term lease are usually locals. The rental property does not have to be fully furnished, although kitchen and laundry appliances must be included. Whether the property has a swimming pool is not important. Long term lease tenants are responsible for water, electricity, gas, cable TV, telephone and Internet service costs. Depending on the lease agreement, some tenants also pay for pool and lawn maintenance. Almost all properties can be long-term rentals.
Short term rentals or vacation rentals are rentals based on weekly or daily rates. The renters are usually tourists of a big party or family, or so-called “snow birds” from Northern America during the winter season. About 100 communities around the Disney World area are zoned for short term rentals by local county governments. Only a property inside a short term rental zone can be used for short term rentals. Short term rental homes are typically equipped with a pool and/or spa and located in a resort community, with more bedrooms and baths, fully furnished with furniture, all major and electric appliances as well as household items such as cooking and eating utensils, bath towels, etc. The property owner is responsible for paying all utilities, cable television, telephone, high speed internet access and all maintenance expenses. It is a home away from home for the renters. Marketing of short term rental homes is done mainly through the internet, and occupancy rate is the key to short term rental success. Managing a short term rental home is similar to running a small business. You will need to apply for a short term rental license and file sales and use tax return with Florida Department of Revenue (http://dor.myflorida.com/dor/) and tourist development tax return with your local county on a monthly basis with your local county on a monthly basis. Your success depends largely on the time and efforts you dedicate to this business.
Compared with short term rental, long term rental requires a lot less efforts. Rental income is stable. Cash return on investment (CAPRATE) is usually in the range of 5% to 8%. One potential risk with long term rental is that you may have to evict your tenants if they default on the rent. Around the Disney World area, eviction process generally takes 3 to 4 weeks and costs approximately $400.
Short term rental is cumbersome and time-consuming, but you do not have to worry about eviction because the renters are tourists and will leave when their vacation ends. Another advantage of short term rental is that you and your family can come to enjoy a vacation at your own villa at any time or to enjoy the Florida sunshine for a few months in the winter when you retire. Short term rental features high rental income and high cost. The potential return on a short term rental could be better than long term rental, if you have the time and energy and are willing to work on the booking and marketing of your property. Multi-Choice does not provide booking service, although we can refer you to a booking agent, who usually charges 10% commission on each booking successfully completed. Based on our observation, the annual occupancy rate is usually in the range of 50-80%, although it is possible to achieve 90% or higher occupancy rate. Cash buyers can easily break even if the occupancy rate reaches 50%.
As such, it is really a matter of personal preference whether you should rent out your property long term or short term. Keep in mind though that it is generally easier to switch from long-term rental to short term rental, while the same is not true vice versa. When you switch from short term rental to long term rental, the furniture package you purchased for your vacation home will be wasted as lease tenants generally move in with their own furniture. Resort community usually provides more services such as clubhouse facilities and services, lawn maintenance, cable TV, etc., however long term tenants might not be willing to pay extra on top of the usual rent for these extra facilities and services.
A short sale is a sale of real estate in which the proceeds from selling the property will fall short of the balance of debts secured by liens against the property and the property owner cannot afford to repay the liens' full amounts, whereby the lien holders agree to release their lien on the real estate and accept less than the amount owed on the debt. Investors interested in a short sale must be aware of the following:
- The sale may not close on the contract price. Sometimes there are more than one lien holder on the property and each and every lien holder has to release the lien for the sale to complete. Sometimes the lender may not approve the sale because debts exceed the sales proceeds by more than what the lender is willing to accept. It is possible that after months of waiting, the lender requests that you pay a price higher than the contract price. When a short sale falls apart, the buy will have wasted the money he or she already spent on home inspection and mortgage application, etc. This is something that investors interested in short sale properties should be prepared for.
- Short sale is a lengthy process and takes a lot longer than a regular real estate transaction. Typically it takes three to four months, possibly up to six months, from the time the contract is signed to close the sale. If the buyer plans to take a home mortgage loan for the purchase, it is important to specify in the contract
- Can I withdraw from the transaction after I have signed the contract of sale?
Yes. If you change your mind or find a better deal during the waiting period or after lender approval, we can cancel the contract and request refund of your earnest deposit on your behalf. Because an AS-IS contract is usually used for a short sale, we can include a contingency clause for home inspection.
After the closing, if the property is in poor condition, it will take two to three weeks to do necessary renovation and repairs, including interior wall painting, floor replacement, air conditioning servicing, purchase of new kitchen and laundry appliances, etc. We will then advertise the property for rental. It usually takes one month to secure a tenant, occasionally it can take up to two months. Lease applicants are usually working class families who either work for the Disney World or in a related service industry, as well as school teachers, hospital nurses, restaurant workers, technicians, transportation workers, etc. Generally speaking, the average income of an Orlando family is on the low end at about $50,000 a year. The long term rental market is relatively stable. The financial crisis has forced a lot of families to give up their homes purchased at the peak of the real estate market, which in turn damaged their credit rating and made it difficult for them to refinance for a new purchase. As such, many families have no choice but to rent. As long as your asking rent is reasonable and the house is in good condition, there should be no problem finding a tenant.
Relatively speaking, a single family house requires a larger investment amount, generally in the range of $90,000 to $180,000. However, your money is well spent because you get more square footage, a garage, and better potential for appreciation. Communities for long term rental properties usually charge low association fees, in the range of $300 to $600 a year, and therefore easier to rent out. On the other hand, the large size of a single family house also means higher maintenance costs such as pool and lawn maintenance. Condos and townhouses cost less to buy, usually priced for $50,000 to $100,000, and less for maintenance. The lower priced properties are usually located in an older community with high and unstable association fees, in the range of $200 to $400 a month. A majority of the properties under our management are single family houses.
When a tenant fails to make rental payment on time, and continues to default after our attempts to collect rent, there is only one solution: eviction through a legal process. The Florida landlord tenant laws are pretty fair to property owners. The eviction process takes an average of one month to complete and costs about $400.