Investment

One of the most attractive qualities for those looking for Florida property investment is its unique tourist-driven rental market, which has quite possibly the world’s only 52-week season. Florida is known as the Sunshine State, with over 300 days of sunshine a year and annual average temperature of 21 degrees Celsius. More than 60 million people visited Florida in 2009, with 50 million visiting Orlando and central Florida alone, making Orlando the world’s single-most-visited tourist destination in the world. Good rentals are always in demand!

Investment returns are realized by:

 *INCOME STREAM    *TAX BENEFITS    *APPRECIATION

The Florida real estate market is ripe with opportunities to take advantage of all components for successful returns!

THE REAL ESTATE CYCLE

The single most important component when investing in real estate is TIME.  The Real Estate market is in a constant cycle of highs and lows that is driven by inventory, that ultimately reflects in price.   There are currently more condos on the market for sale in Florida than there is demand for, due to a high rate of forclosures, estate sales, and tightened lending policies from the banks that is prohibiting many from owning a home.  This market environment creates an opportune time for investors and the financially qualified to acquire properties at record low prices.

INCOME STREAM

This can either be an easy task or difficult one, depending on the location and type of condo. Condos close to the water and especially with an ocean view bring in the highest rents, and are in demand for seasonal short term rentals. Condos inland and away from tourist areas, are generally sought after for annual rentals of local residents. Many investors prefer to rent the condo for only a part of the year so they can also have it available for your personal use. Consider these factors when deciding on your investment:

 TAX TREATMENT

Deductible Expenses

Real property is depreciated over a period of 27.5 years. Only structures may be depreciated, land is never depreciable. Cost recovery deductions are claimed during the time of ownership and recaptured at the time of sale at are taxed at the rate of 25%.

Special Considerations

• If the property is owner occupied part time and rented for less than 14 days in a year, the owner is not required to report the rental income. No tax deductions can be claimed for the properties expenses or upkeep if no income is reported from it.
• If the property is owner occupied for more than 14 days or 10% of the time whichever is greater, in a year, it is considered a personal residence.
• Time spent working on, repairing, maintaining, and improving the property is not considered in the 14 day usage.

Capital Gains Tax

The Capital Gains tax exclusion only applies the gains realized off the sale of a primary residence. One may convert their vacation home or rental property into their primary home to take advantage of the incentive. The owner must be in the residence for 2 concurrent years of the past 5 years of ownership. A gain of up to $250,000 (or $500,000 for joint returns) on the sale of a personal residence may be excluded from taxable income. This exclusion may be claimed once every 2 years.

 FOREIGN INVESTOR INFO

To take advantage of any of the several unique tax benefits and avoid the traps, the Taxpayer Investor must find the proper investment vehicle that meets the Foreign Taxpayer’s tax needs and his or her other personal and commercial needs. There are three very basic structures that will show the different types of tax considerations depending upon the nature of the real estate:

Individual Ownership/Pass Through Entity: Individual ownership of real property by a non-resident alien or ownership through a Pass Through entity results in the non-resident alien being required to file a U.S. tax return, and most likely subjects him or her to estate taxes on the real property.  However, this is the best vechicle for income tax purposes.

Foreign Corporate Ownership: A foreign taxpayer investing in passive, non income producing real estate, who wished to avoid estate taxes and preserve anonymity might use a single foreign corporation to own the real estate.  The foreign taxpayer should know that the capital gains earned by the foreign corporation from the sale of the real estate could be significantly higher than with individual ownership.  Since there is no annual income from passive real estate holdings, the Branch Tax can be avoided by the liquidation of the foreign corporation after the sale of the foreign corporation’s real estate.

Real Estate Holding Company: A foreign taxpayer involved in active real estate business, such as ownership of income producing propertry or development property, may form a foreign holding corporation that is 100% owner of a domestic U.S. corporation.  This structure can eliminate at least 2 of the 3 taxes the foreign tax payer might be liable for.  Since the direct investor in the real estate is a domestic corporation, it need not pay any Branch Tax on it’s profits.  Also, since a foreign investor owns only shares in a foreign corporation, there is no estate tax unpon his or her demise.  The income tax however, is generally uinfavorable as compared to individual ownership.

 FOREIGN INVESTMENT IN REAL PROPERTY TAX ACT

The gain of a non resident alien or foreign corporation on the disposition of a U.S. real estate interest is deemed to be effectively connected with a trade or business carried on in the United States, even if the property is a wholly passive investment and has generated no income during the holding period. All gains, profits, and income resulting from the sale are deemed US sourced income. FIRPTA withholding tax rules require the buyers must withhold and remit 10% of the amount realized to the IRS. The transferor may be a non resident alien individual, foreign corporation, foreign partnership, or a foreign trust or estate. The person acting as a withholding agent is required to withhold 10% of the amount realized by the transferor in the transaction and submit the withheld amount to the IRS by the 20^th date after the day of the transaction.

Transactions may be exempt from FIRPTA withholding if:

•  The buyer acquires the property as a personal residence and the purchase price does not exceed $300,000.
• The IRS provides a statement to the buyer that the seller is exempt from withholding or has made satisfactory arrangements.
• The seller furnished an affidavit certifying that the seller is not a foreign person.

 OTHER TAXES

Income Tax:Income derived by a Foreign Taxpayer from United States real estate has its own unique taxation pattern that is different in many instances from other types of income earned by the Foreign Taxpayer. A Foreign Taxpayer will generally pay income tax like a United States investor on its real estate income and the Foreign Taxpayer will pay tax on capital gains derived from a sale of United States real property like the U.S. taxpayer.

Capital Gains: Like the U.S. taxpayer, in the event of real estate capital gains, there is a distinct benefit between capital gains earned by a non-resident alien individual who will be taxed at the lower long-term capital gains rate of 15%, and the capital gains earned by a foreign corporation that might carry a Florida state and Federal income tax on the same gain approaching 40%.

Estate/Gift Taxes: A non-resident alien individual can be subject to the United States estate and gift taxes. However, non- resident aliens are subject to U.S. estate and gift taxes only on assets situated in the U.S. U.S. real estate is one of the items that is subject to U.S. gift taxes.

The Branch Tax: There is an additional tax that foreign corporations must be aware of. This is a major trap for the unwary. Subject to the provision of a potentially applicable United States tax treaty; a foreign corporation may be subject to not only the combined Florida and Federal income tax approaching 40%, but also foreign corporations with earnings from United States real property investments could be subject the additional United States Branch Tax of 30%.  

APPRECIATION

Back in the 1960s, a two bedroom bungalow could be bought for $6,999. Then in 2006 the price of the same modest home vaulted in value to $240,000. The same house today could be bought for $120,000. With the exception of the previous 4 year melt down that was mostly influenced by irrational lending, property values in Florida have been appreciating regularly at various rates, and have never hit a negative until recently. So the clock has been turned back to early 1990’s pricing, making the time right to purchase a Florida property and expect modest gains even with the market correction.

Historical Florida Home Appreciation

Annual Florida Price Appreciation Rates

With prices still at record lows, now is an opportune time to invest in Florida properties. Florida condos will always be in demand for rental, with the tourism industry, and increased need for rental housing for those who do not qualify for a mortgage.