Everyone likes to make a profit, but taxes in the U.S . require you to report capital gains. First of all, you should start with the first concept. A capital gain is obtained when an asset such as stocks, bonds or real estate is sold for more money than was paid when buying it (Regions, n.d.).
The tax on this type of earnings is divided into two forms:
- Short-term: Obtained from assets that were held for a year or less. The charge is at least 25% of the profit or more.
- Long-term: it is obtained from assets that were held for more than a year. The charge ranges from 5 to 25%.
For this article, emphasis will be placed on said tax applied to the sale of real estate. The question then is, do non-residents or EB5 visa holders also have to pay the so-called capital gains tax?
Non-resident foreigners and payment of capital gains tax
Most U.S. states allow foreigners to acquire real estate for personal use or as an investment. But their status as non-residents does not exempt them from paying capital gains tax (Suárez, 2014).
In that case, the profit generated by selling a property is taxed at a maximum rate of 20%.
The problem is that foreigners are subject to 10% for provisional withholding of the sale value. Which makes the income tax more expensive. However, there are alternatives to decrease, eliminate or request the return of such withholding. That is one of the reasons why advice with a professional is recommended.
Impact of Capital Gains Tax
The number of days the investor spends in Miami (or anywhere in the U.S.) impacts the calculation of capital gains tax. If the investor physically remains in the United States for 31 days of the current year or 183 days in a period of 3 years, he is considered a resident alien (IRS, n.d.).
In that case, the capital gain will be charged in the same way as for Americans. As mentioned at the beginning: 25% or more for short-term earnings and between 5 and 25% for long-term (Miami Inmobiliario, n.d.).
There is another important aspect. If a person who owns a property in Miami and uses it as a home for 2 years, they are exempt from capital gains tax (Barrios, 2019).
This is because the sale of a residential property is exempt from this tax, with no transaction limit. As long as they are used as a personal home, you can buy and sell as many properties as you want.
How to Estimate Capital Gains Tax
Calculating capital gains is a relatively straightforward process. The sale price must be subtracted from the purchase price and the expenses that affect the profit (Barrios, 2019). It will be better if it is explained with an example. A person buys a unit in 2010 for US $ 400 thousand and in 2016 sells it for US $ 520 thousand.
When it purchased, it had a transaction closing cost of US$10,000. In addition, in 2013 he remodeled the garage, which cost him US $ 20,000. At the time he sold it, he had real estate commission costs of $24,000 and other closing costs of $6,000.
The profit, then, would be calculated as follows:
Purchase: US$400,000 (property) + US$10,000 (closing costs) + US$20,000 (remodeling) = US$430,000.
Sale: US$520,000 (property) – US$24,000 (commissions) – US$6,000 (closing costs) = US$490,000.
Profit calculation: US$490,000 – US$430,000 = capital gain is US$60 thousand.
How to deal with capital gains tax
To file capital gains tax, you need to fill out two forms (IRS, n.d.):
- Form 8949: Sales and Other Dispositions of Capital Assets.
- Schedule D of Form 1040: on capital gains and losses.
We recommend you consult with a specialist because there are ways to minimize this tax, for example (Orem, 2020):
- Maintain the property for more than a year before selling.
- Inhabit the house the minimum time necessary to be excluded.
- Balance earnings with dividends.
- Use accounts with tax advantages.
A professional advisor will be able to understand your particular context and recommend the best way to trade. This will allow you to make the most of your capital gains generated from the sale of Miami real estate.
References
Barrios, M. (March 19, 2019). Real estate taxes in Miami – USA
Peruvian Real Estate Society. Retrieved from https://bienesraicess.com/blogs/impuestos-inmobiliarios-miami-ee-uu/
Internal Revenue Service, IRS. (undated). Resident and non-resident foreigners
Residents. Retrieved from https://www.irs.gov/es/taxtopics/tc851
Miami Real Estate. (undated). Miami Tax Considerations.
Retrieved from https://www.miamiinmobiliario.com/impuestos-en-miami/
Orem, T. (September 25, 2020). Income Tax Rates
of 2020 capital and how to calculate your bill. Nerwallet. Retrieved from https://www.nerdwallet.com/article/taxes/capital-gains-tax-rates
Regions. (undated). How are income taxes levied from
capital? Retrieved from https://espanol.regions.com/Perspectivas/Patrimonio/Planificaci C3 B3n-tax-and-equity/Plan-Tax-Strategies/10w3/Capital-gains-Planning%C3%B3n-of-Equity%C3%