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With all of the international investors purchasing condos and homes in South Florida, the question arises as to whether a person who is not a green card holder or a US citizen may claim the protections and benefits of Florida “homestead”. For a general overview of homestead please see our previous article here.
Non-immigrants are those people in the US who do not have either a green card (permanent residence) or US citizenship. Non-immigrant categories include the B visa, E visa, L visa, O visa, H-1B visa, among many other non-immigrant visa categories.
Qualifying your home as a “homestead” affords many advantages such as limiting the increase in property taxes to a maximum of 3% per year and protecting the home from creditors. However, not everyone can claim homestead on a Florida home even if they are living in the home full time as shown below.
To qualify your home as homestead you must be able to make your home your “permanent residence”. Therefore, if you are a non-immigrant investor without a green card or US citizenship you may not qualify for the homestead exemption.
In 1963 the Florida Supreme Court found that a non-immigrant could not receive the protections and benefits of Florida’s homestead laws since the applicant was a non-immigrant. See Juarrero v. McNayr, 157 So. 2d 79 (Fla. 1963). This means that if a homestead applicant does not hold either a green card or US citizenship, then typically the applicant will not be able to qualify their Florida home as a homestead because they cannot form the intent to reside in Florida permanently. The reason is that the applicant is limited in the amount of time that they can stay in the US due to their non-immigrant status.
However, a non-immigrant who has US citizen children or spouse may potentially claim the homestead exemption for the benefit of their US citizen family members. The Florida Supreme Court addressed this issue in Garcia v. Andonie, 101 So. 3d 339 (Fla. 2012) where the Court found that a married couple from Guatemala in E-2 visa status could claim homestead on their Florida home, but only because the couple had US citizen children.
It is also worth noting that certain US visas require that the holder not have what is called “immigrant intent”, or the intent to make the US his or her permanent home. Therefore, claiming the Florida homestead protection could potentially have adverse consequences on immigration benefits.
The story is not all glum, since even an investor in non-immigrant status may not be able to qualify his or her residence as a Florida homestead, the annual property taxes are currently capped at a maximum increase of 10%. This means that if your property value increases by 25% in a year, the maximum amount that your property taxes could increase is only 10%. And if one year the value increases by less than 10%, the tax will only reach the amount of such increase.
If you would like to review your ownership structure, tax plan, or immigration plan feel free to reach out to the attorneys of PRA Law.
International investors and professionals choosing to invest in the United States need to plan in advance how their investments will be taxed by the U.S. Internal Revenue Service. Up front planning is paramount, and failure to do so could result in hundreds of thousands of dollars being paid to the U.S. government unnecessarily. In general, a non-resident should understand the basics regarding two taxes in the U.S.: income tax and inheritance tax as further explained below.
U.S. Income Tax
In general, non-residents are taxed on their income derived from U.S. sources. This would include dividends from U.S. stocks, rental income for a condo owned by the investor, and most clearly, wages earned from a U.S. employer while living in the U.S. on a work visa (such as an L-1A, H-B, or E-2 visa).
For U.S. assets that create income (stock dividends, rental income, etc.) the non-resident will need to declare such income on an annual return submitted to the IRS. The same is true for any wages earned from a U.S. employer while here on an employment visa. But what most investors may not know is that once one passes a certain number of days living in the U.S. the international investor must declare his or her entire world-wide income on the U.S. tax return.
The requirement to declare the investor’s world-wide income on a U.S. tax return, and therefore potentially pay taxes in the U.S. on such income, occurs when the non-resident meets the “substantial presence test.” The magic number is 183 days. If the non-resident lives in the U.S. for 183 days or more in the U.S. then his or her world-wide income must be declared. The 183 days are summed up by adding 100% of the current years’ days, 1/3 of last years’ days, and 1/6 or the days spent in the U.S. two years ago.
This may scare some, but rest assured that in general the international investor is not always going to be taxed twice. This is because the U.S. gives the investor a credit for the amount of tax payed in the country where the income was generated. So imagine that the investor is from Argentina, pays 20% on a certain type of income in Argentina on an argentine asset, and the similar tax in the U.S. would be 28%. In this example the investor pays the difference, i.e. 8% on his or her U.S. tax return.
There is more good news. If the investor is from a country that maintains a tax treaty with the U.S., there may be provisions in such treaty to eliminate the need for the investor to pay that 8% difference at all.
So counting your days spent in the U.S. is imperative. And if you are going to fall under the substantial presence test then plan in advance with your tax attorney and accountant to reap all of the tax benefits possible given your individual circumstances.
U.S. Inheritance Tax
If you are a non-resident, when you pass on typically you will only pay for inheritance tax on your U.S. situated assets. So if a non-resident is living and working in the U.S. on an E-2 visa and three years later the unthinkable occurs, he or she will likely not pay a tax to pass on assets owned, for example, in Europe.
But the non-resident’s U.S. assets will be subject to U.S. inheritance tax. Take a condo in New York for example, worth $1 million. Non-residents obtain an inheritance tax exemption of $60,000 on their U.S. assets, then the value above $60,000 is taxed at a scaled rate of up to 40%. So if the unthinkable happens, the family members of the investor will need to pay about $350,000 to the U.S. government.
This can be avoided in different ways, all of which require that the investor plan in advance with a knowledgable tax attorney and accountant who understand U.S. tax on foreigners. One way is for the New York condo to be owned by an offshore corporation. Another way is for the non-resident to title the condo in the name of a U.S. LLC, and title most of the LLC shares in his or her children’s names. Or the investor can have a low-cost U.S. life insurance policy that covers the amount of the tax imposed.
The tax rules for foreigners are more complex than described above, but the principles discussed in this article show that non-residents who chose to invest or live in the U.S. can avoid paying unnecessary taxes by working closely and in advance with their trusted tax counsel.