Foreign Income, FBAR & FIRPTA: A Tax Guide for Miami Business Owners and Real Estate Investors
South Florida is home to thousands of business owners with family, bank accounts, or companies outside the United States, and it is one of the top markets in the country for foreign real estate buyers. That international activity comes with some of the most heavily penalized filing requirements in the tax code. Many of these forms carry penalties of $10,000 or more even when no tax is owed. This guide covers the requirements we see most often with our Miami clients.
Worldwide Income: US Citizens and Residents Report Everything
US citizens and green card holders are taxed on their worldwide income, no matter where it is earned or where the money is kept. Rental income from an apartment in Bogota, consulting fees paid into a bank in Madrid, and dividends from a family company in Caracas all belong on your US return.
Double taxation is usually avoided through the Foreign Tax Credit (Form 1116), which credits taxes you paid to another country against your US tax. Americans who live and work abroad may also qualify for the Foreign Earned Income Exclusion (Form 2555). The key is reporting the income correctly first, then applying the right relief.
FBAR: Reporting Foreign Bank Accounts
If you have a financial interest in, or signature authority over, foreign financial accounts whose combined value exceeded $10,000 at any point during the year, you must file FinCEN Form 114 (the FBAR). The threshold is based on the total of all accounts combined, not each account on its own.
The FBAR is filed electronically with FinCEN, separately from your tax return. It is due April 15, with an automatic extension to October 15. Non-willful penalties can exceed $10,000 per year, and willful violations can cost up to 50% of the account balance.
- Bank and brokerage accounts held outside the US
- Accounts owned by your business where you have signature authority
- Foreign retirement and pension accounts in many cases
- Joint accounts with family members abroad
FATCA Form 8938: A Second, Separate Requirement
Form 8938 is filed with your tax return and covers foreign financial assets, including foreign accounts, foreign stock, and interests in foreign entities. For US residents, it is required when foreign assets exceed $50,000 at year end or $75,000 at any time during the year if single, and $100,000 or $150,000 for married couples filing jointly.
Many clients assume the FBAR covers this. It does not. The two forms have different thresholds and different agencies, and it is common to owe both.
Owning a Foreign Company, or a US Company with Foreign Owners
US persons who own or control a foreign corporation generally file Form 5471, one of the most detailed returns the IRS requires. Going the other direction, a US corporation that is at least 25% foreign owned, or a single-member LLC owned by a foreign person, must file Form 5472 to report transactions with its owner.
The penalty for a missing Form 5472 is $25,000 per year. We regularly see foreign investors who formed a Florida LLC to hold property or run a business and were never told this form existed.
FIRPTA: When a Foreign Owner Sells US Real Estate
The Foreign Investment in Real Property Tax Act (FIRPTA) requires the buyer to withhold 15% of the gross sale price when the seller is a foreign person. That is 15% of the total price, not 15% of the profit, so the amount withheld is often far larger than the tax actually owed.
There are reduced rates when the buyer will live in the property. A sale price of $300,000 or less to a buyer using it as a residence can qualify for no withholding, and prices up to $1,000,000 can qualify for 10%. The withholding is reported to the IRS on Forms 8288 and 8288-A within 20 days of closing.
- Apply for a withholding certificate (Form 8288-B) before closing to reduce withholding to the estimated actual tax
- File Form 1040-NR (or 1120-F for a foreign corporation) after the sale to report the gain and claim a refund of excess withholding
- Keep closing statements, purchase records, and improvement receipts to prove your cost basis
- Plan the sale with your CPA and closing agent at least 60 days in advance
Foreign Owners of Florida Rental Property
Rent paid to a foreign owner is subject to 30% withholding on the gross rent unless the owner elects to treat it as business income. With that election, the owner files a US return each year (Form 1040-NR), deducts mortgage interest, property taxes, depreciation, and repairs, and pays tax only on the net profit. For most investors, this is the difference between paying tax on every dollar of rent and paying little or no tax at all.
Foreign owners should also understand that the US estate tax exemption for nonresidents is only $60,000 of US assets. Holding property through the right structure can matter a great deal for families with significant Florida real estate.
Get Compliant Before the IRS Finds You
If you have missed FBARs or other international forms in prior years, the IRS offers streamlined procedures that can dramatically reduce penalties for taxpayers whose mistakes were not willful. Those options are only available before the IRS contacts you.
MDR Consulting CPA works with Miami business owners, foreign nationals, and real estate investors on FBAR, FATCA, FIRPTA, and cross-border planning. Schedule a confidential consultation to review where you stand.
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