THE BOTTOM LINE ON CAPITAL GAINS TAX RATES

FOR FOREIGN INVESTORS

ON U.S. REAL ESTATE INVESTMENTS
 

June 27, 2006

Thomas C. Roberge & Company

St. Petersburg and Sarasota

Telephone: (727) 822-9393
Contact: TaxInfo@RobergeCo.com
 
Copyright, 2006, Thomas C. Roberge & Company
All Rights Reserved
  
Telephone: (727) 822-9393
Contact: TaxInfo@RobergeCo.com
 
Copyright, 2006, Thomas C. Roberge & Company 

 
We often hear complaints when foreign investors sell U.S. real estate and have to pay capital gains taxes on real estate profits.  The FIRPTA withholding rules are designed to ensure that a foreign investor pays the same tax that a U.S. resident would pay if he or she sold the same property.  The 10% withholding is only an estimated tax against the foreign seller's final U.S. tax liability.  If the final tax is less, then the seller receives a refund for the difference if they follow established procedures.  In other words, Congress wants to make sure that the tax burden is shared evenly so that we (U.S. residents) are not left having to shoulder the entire tax burden on U.S. real estate investments.
 
When our foreign clients complain about having to pay tax on their real estate gains, we need to educate them so they understand that the maximum long-term capital gains tax rate for individuals is only 15%!  This means that they get to keep 85% of the profit after taxes.  Most of them come from countries where the capital gains tax rates are much higher.  For example, the maximum tax rate on capital gains in Canada is about 23%; the United Kingdom has a maximum capital gains tax rate of 40%.  That makes our 15% rate look like one heck of a deal.  Also, most countries allow a full credit for the U.S. capital gain tax against their own tax.
 
You also need to continually emphasize to your foreign investor clients that real estate is a great investment because of these low tax rates and that it is the favored industry in this country by Congress and will continue to be.  You couple that with the fact that the U.S. dollar has weakened considerably against major foreign currencies makes U.S. real estate a great investment opportunity.  The strengthening of the major foreign currencies against the dollar during the past few years far exceeds recent rises in interest rates and property taxes.
 
This newsletter may sound like we are concerned when we hear these complaints by foreign investors about having to pay taxes on real estate sales.  The fact is the capital gains tax rate is amongst the lowest in the world.  This is a time of great investment opportunities.