US TAX FAQ

Frontline Florida Realty

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Ten Most Frequently Asked Questions by U. S. Nonresident Aliens

Presented below is a list of the ten most frequently asked questions by U.S. Nonresident Aliens buying rental homes in Florida. We hope the discussion that follows will clear up some of the questions you have concerning ownership of United States rental property.

1. What income tax declarations must I file?

Two annual forms are required to be filed on your behalf. The first, Form 1040NR, U.S. Nonresident Alien Income Tax Return, is the form on which all income and deductions related to your rental property will be reported. By filing Form 1040NR, you are electing to have income from your rental property deemed to be connected with a U.S. trade or business. This in turn allows you to deduct ordinary and necessary expenses as discussed below. The second, Form W-8ECI, Certificate of Foreign Person’s Claim for Exemption from Withholding of Income Effectively Connected with the Conduct of a Trade or Business in the United States, exempts you from withholding of United States income tax through the net basis election. Without this form, taxes would be withheld based on 30% of gross rents and no deductions would be allowed.

2. Are there any other State or local filings that I am required to make?

You may be subject to other filing requirements as follows:

a. Real property taxes are calculated by the county tax authorities. Values are assessed annually and the assessment notice will be sent to you (or your mortgage holder if you deposit your taxes monthly with them) in November. You or your mortgage holder must then return the notice with payment.

If you purchase a house that contains furniture or other personal property that is not attached to the house, Form DR-405, Tangible Personal Property Tax Return, will need to be filed annually on your behalf. The return, detailing any personal property contained in the rental house, is filed with the county in which your property is located.

c. If you rent your property for periods less than six months you will be required to collect and pay sales tax to the State of Florida, Department of Revenue, on transient rentals. In addition to the applicable six percent sales tax (seven percent on properties located in Osceola County), a tourist development tax (four percent on properties located in Polk County and five percent on properties located in Orange and Osceola County) must also be collected and paid monthly to the county in which your property is located. Please note that sales tax and tourist development tax must be collected on all rental income from properties located in Florida regardless of where the rent is collected. Rental periods longer than six months are not subject to these taxes.

3. What income tax rate must I pay?

For 2003, if you are single, your first $7,000 of taxable income will be taxed at 10%. Income over $7,000 and up to $28,400 will be taxed at 15%. Income over $28,400 and up to $68,800 will be taxed at 25%. Income over $68,800 and up to $143,500 will be taxed at 28%. Income over $143,500 and up to $311,950 will be taxed at 33%. Income over $311,950 will be taxed at 35%.

If you are married, your first $7,000 of taxable income will be taxed at 10%. Income over $7,000 and up to $28,400 will be taxed at 15%. Income over $28,400 and up to $57,325 will be taxed at 25%. Income over $57,325 and up to $87,350 will be taxed at 28%. Income over $87,350 and up to $155,975 will be taxed at 33%. Income over $155,975 will be taxed at 35%.

4. What happens when I sell my property?

Due to depreciation, mortgage interest and other operating deductions (as explained below), your rental property will probably generate a tax loss while being rented. These losses are accumulated on Form 1040NR and carried forward to reduce future income or gain from the sale of the property. If a gain on the sale of the property exceeds these losses, the net capital gain is taxed at a maximum rate of 20% (10% for individuals in a 15% tax bracket) provided the property was held for longer than one year. If the property is sold at a loss, no tax liability results. However, regardless of whether or not you have a taxable gain, a withholding tax equal to 10% of the gross sales price is required to be withheld from the seller's funds at closing. When you file your subsequent calendar year Form 1040NR and report the sale of your property, the withholding tax is reported as a credit. This credit is applied to any tax due from gain on the sale of your property and any excess will be refunded to you. If you have no gain, all your withheld tax will be refunded to you. There are certain exceptions to the withholding requirement that are beyond the scope of this discussion. Since this is a complex issue, professional advice should be sought.

5. What expenses can I charge off against the rental income my property generates?

Deductions include, but are not limited to, advertising, cleaning, maintenance, commissions, insurance, tax return preparation fees, management fees, mortgage interest, repairs, supplies, property taxes, depreciation (explained below) and utilities. Most expenses that are ordinary and necessary in the operation of a rental property are deductible. If larger expenditures are required, i.e. a new air conditioner, these items are capitalized and depreciated over future years.

6. I have heard that we can depreciate (amortize) the cost of the house, furniture and large repairs. Is this true?

Yes. Since the house (not including the land), furniture and some large repairs have a useful life greater than one year, they must be depreciated. Under the current laws, the cost of the house is "capitalized" and deducted over a period of 27 1/2 years. Furniture and repairs usually have a useful life of 5 to 15 years, depending on the specific item.

7. Can I deduct my airfare and travel expenses when I travel to Florida?

If your trip is primarily for business purposes, the airfare and certain related travel expenses are deductible. These expenses might include car rental, local transportation to and from a meeting with your property manager and a meal over which a business discussion took place. Only expenses directly related to your United States rental property can be deducted.

8. If my spouse and I jointly own the property, will we have to file two returns?

Yes. U.S. Nonresident Aliens may not file a joint U.S. tax return. Two returns are prepared and all income and deductions are divided equally on the two returns. This has very little overall effect on your tax liability, although it will slightly increase the cost to prepare the required returns.

9. If I own more than one rental home in Central Florida, will I be required to file more than one tax return?

No. An unlimited number of rental homes can be reported on one Form 1040NR. Each rental property's revenue and deductions are reported separately on Schedule E, Supplemental Income Schedule.

10. Can I take a credit or a deduction for taxes I pay in my home country on my United States tax return?

No. Because you are not paying tax on your "world-wide income" but only on United States source income, you are not eligible to receive a credit or a deduction for taxes paid in your home country.

If you would like further information or we can assist you in your U.S. and Florida tax needs, please contact our firm at telephone 321-939-0915 or email mathomas@cfsecpa.com.

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