It is necessary to have an understanding of the common legal terms to ensure you are fully aware of the implications of buying in Florida as the process is quite complex and can be a potential mine field if not managed correctly. If in doubt of any legal jargon consult a real estate professional for clarification before you sign.
Taxation is a very important issue for all overseas investors and it is imperative you seek the advice of a tax consultant to protect your interest and stay within the law.
Foreign Investors Real Property Tax Act (FIRPTA)
One particular tax implication that you should be aware of is the Foreign Investors Real Property Tax Act (FIRPTA). In general if you are a foreign investor and sell your property, the government needs to ensure you will not take all your money out of the country without paying your tax obligations. The real estate agents or the Title company handling the sale of your property are obligated to retain 10% of the gross price you sell for irrespective if any profit or loss. Your tax consultant should make the necessary arrangements for you in good time prior to the closing. Certain exemptions are applicable and should be verified at point of sale.
A 1031 Exchange, also known as a “Like Kind Exchange”, is a way of structuring a sale of certain kinds of property so that the seller’s profit or gain is not currently taxed. Instead, the property that is sold is replaced with another “like kind” property. If the transaction is properly structured, the seller’s profit or gain is deferred to a future date.
The purpose of a 1031 exchange is to defer the payment of capital gains taxes that would otherwise be due on the sale of business or investment property - thus leaving the owner with more money to invest in replacement property. A 1031 exchange does not eliminate taxes. It defers taxes and allows the owner to use the deferred tax amount for continued business or investment purpose.