No, nonresidents do not pay capital gains tax to the state of Florida. The Florida Constitution forbids a state-level personal income tax, which means there is no state tax on the profit from selling real estate for anyone, resident or not . However, every nonresident seller must pay capital gains tax to the U.S. federal government, and this is where the primary conflict arises.
The core problem is a federal law called the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA). This law does not create a new tax, but it forces a mandatory withholding of 15% of the property’s gross sales price when the seller is a foreign person. The immediate negative consequence is that a massive portion of the seller’s money is seized at closing and sent to the IRS, even if the property was sold at a loss and no tax is actually owed .
This withholding mechanism is a significant financial trap; on a $500,000 property sale, a foreign seller can have $75,000 instantly withheld by the buyer and sent to the IRS, regardless of the actual profit . Navigating this rule, and the separate set of rules for out-of-state U.S. citizens, is critical to protecting your investment returns.
Here is what you will learn to solve these exact problems:
- 🗺️ Identify Your Path: You will learn to distinguish between the two types of “nonresidents” and understand which set of punishing tax rules applies directly to you.
- 💰 Unlock Your Withheld Cash: Discover the specific IRS form and process that can reduce the mandatory 15% FIRPTA withholding to zero, freeing up your money at closing.
- 🏠 Escape Your Home State’s Tax Net: For U.S. citizens, you will get an audit-proof checklist for legally changing your domicile to Florida before you sell, potentially eliminating your old state’s income tax on the gain.
- 🛡️ Choose the Right Ownership Armor: Learn the pros and cons of owning property as an individual, in an LLC, or through a foreign corporation to shield your assets from either U.S. income tax or the devastating 40% U.S. estate tax.
- ❌ Avoid Costly Blunders: Pinpoint the most common and expensive mistakes nonresidents make and learn the precise steps to avoid them.
The Two “Nonresidents”: Why Your Passport Matters More Than Your Address
The term “nonresident” creates dangerous confusion because U.S. tax law splits it into two completely different groups. The rules, risks, and strategies for each are vastly different. The first step is to identify which category you belong to, as this determines the entire legal framework you must follow.
The first group is Foreign Nationals, also known as “nonresident aliens” to the IRS. This includes any property seller who is not a U.S. citizen and does not have a Green Card or meet the “substantial presence test,” which is a formula based on the number of days spent in the U.S.. Their entire journey is dominated by the federal FIRPTA withholding rules.
The second group is Out-of-State U.S. Citizens. This includes American citizens who are legally domiciled in a state with income tax, like New York or California, but own property in Florida. They are completely exempt from FIRPTA, but their main challenge is preventing their home state from taxing the profit on their Florida property sale.
| Your Legal Status | The Law That Governs Your Sale |
| Foreign National (Nonresident Alien) | The Foreign Investment in Real Property Tax Act (FIRPTA) is your primary concern. Your main goal is to manage the mandatory 15% federal withholding on your sale. |
| Out-of-State U.S. Citizen | Your home state’s tax code is your primary concern. Your main goal is to legally sever ties with that state to avoid paying state income tax on your Florida property gain. |
The Foreign Seller’s Gauntlet: Navigating the FIRPTA Withholding Trap
For foreign nationals, selling Florida property means confronting a strict federal law designed to ensure taxes are paid. This law, FIRPTA, is not a tax itself but a powerful tool the IRS uses to hold a seller’s money hostage until their tax obligations are settled. Understanding how to navigate this process is the key to a successful and profitable sale.
What is FIRPTA and Why Does the Buyer Hold Your Money?
FIRPTA is a federal law that forces the buyer of a property to become a withholding agent for the IRS when the seller is a foreign person. The law’s purpose is to prevent foreign sellers from taking their profits and leaving the country without paying the required U.S. capital gains tax. It solves this problem by making the buyer legally responsible for withholding the money.
If the buyer fails to withhold the correct amount from the foreign seller, the IRS can hold the buyer personally liable for the tax. This immense risk is why every title company, escrow agent, and real estate attorney involved in a transaction is extremely strict about enforcing FIRPTA compliance. They are protecting the buyer, and by extension themselves, from a massive financial penalty.
The 15% Rule: How a Profitless Sale Can Still Cost You Thousands Upfront
The standard FIRPTA rule requires the buyer to withhold 15% of the gross sales price of the property, not 15% of the profit. This is the most misunderstood and financially damaging part of the law. Even if you sell your property for less than you paid for it, resulting in a capital loss, the 15% withholding on the total sale price is still mandatory .
Imagine you are a foreign national who bought a Florida condo for $400,000. After years of ownership and a market downturn, you sell it for $350,000, realizing a $50,000 loss. Because of FIRPTA, the buyer is still legally required to withhold 15% of the $350,000 sale price, which is $52,500. This money is taken from your proceeds at closing and sent to the IRS, even though you owe zero capital gains tax because you had no gain.
| The Action | The Painful Consequence |
| A foreign investor sells a Florida property for $500,000, but their original purchase price plus improvements was $550,000, resulting in a $50,000 loss. | The buyer is still legally required to withhold $75,000 (15% of the $500,000 gross price) and send it to the IRS. The seller now has to wait up to 18 months to file a tax return and prove they had a loss to get their $75,000 back. |
Your Escape Hatches: FIRPTA Exemptions That Can Save Your Closing
There are a few critical exceptions that can reduce or even eliminate the 15% withholding. These exceptions almost always apply to properties that the buyer intends to use as their personal residence. The responsibility falls on the buyer to sign a legally binding affidavit at closing, swearing under penalty of perjury about their intent to live in the home.
The buyer must have “definite plans” to reside in the property for at least 50% of the days it is in use during the first two years after the sale. If the buyer signs this affidavit, the withholding rate changes based on the sale price. For any property sold that will not be the buyer’s primary residence (like commercial property, vacant land, or a rental), the full 15% withholding always applies.
| Sale Price of the Property | Withholding Rate (If Buyer Signs Residency Affidavit) |
| $300,000 or less | 0%. The withholding is completely waived. |
| $300,001 to $1,000,000 | 10%. The withholding is reduced from 15% to 10%. |
| Over $1,000,000 | 15%. The full 15% withholding applies, even if the buyer will use it as a residence. |
The Ultimate Pre-Sale Weapon: Unlocking Your Cash with a Withholding Certificate
The most powerful tool for a foreign seller is the IRS Withholding Certificate. This is a formal application process where you ask the IRS for permission to reduce the FIRPTA withholding before the closing date. If approved, the certificate allows the withholding to be based on your actual, calculated tax liability instead of the punishing 15% of the gross sale price.
This strategy is essential in two common situations: when you are selling at a loss, or when you have a very small profit compared to the sale price. In both cases, the withholding certificate can prevent tens or even hundreds of thousands of dollars from being unnecessarily locked up with the IRS for over a year.
What is IRS Form 8288-B and How Does It Work?
The application is made using IRS Form 8288-B, “Application for Withholding Certificate for Dispositions by Foreign Persons of U.S. Real Property Interests.” You must file this form as soon as you have a signed sales contract but before the date of closing. The form requires you to calculate your maximum possible tax on the gain, providing evidence to the IRS that the standard 15% withholding is excessive.
For example, if you are selling a property for $800,000 with a cost basis of $750,000, your gain is only $50,000. The actual long-term capital gains tax might be around $7,500 (15% of the gain). Without a certificate, the withholding would be $120,000 (15% of the $800,000 price). By filing Form 8288-B, you can request a certificate that allows the withholding to be just $7500, freeing up $112,500 of your money at closing.
A Guide to the Key Information for Form 8288-B
While a tax professional should always prepare the form, understanding the required information is crucial for a smooth process. You will need to provide detailed information about everyone involved in the sale, the property itself, and the financial calculations of the transaction.
The form is divided into several parts, each requiring specific details. Part I asks for information about the withholding agent, who is typically the buyer. Part II is for the seller’s information, and this is where a common mistake occurs: you must have a U.S. Individual Taxpayer Identification Number (ITIN) to file this form. Applying for an ITIN can take months, so this must be done long before the property is even listed for sale.
Part III requires details about the property and the sale, such as the contract date and sale price. The most critical section is where you justify the reduced withholding. You must provide a detailed calculation of your capital gain, starting with the original purchase price, adding the cost of any capital improvements, and subtracting any depreciation you may have claimed if it was a rental property. This determines your “adjusted basis,” which is then subtracted from the sale price to find your gain and the estimated tax due.
The Waiting Game: What Happens After You File
The IRS states it normally takes at least 90 days to process a Form 8288-B application. Because of this long delay, it is critical to file the form as early as possible. If the closing date arrives and the IRS has not yet issued the certificate, the law still requires the full 15% to be withheld.
However, there is a solution. If an application is pending, the withheld funds do not have to be sent immediately to the IRS. Instead, the money can be held in an escrow account by the closing agent or attorney until the IRS makes a decision. Once the certificate is issued, the escrow agent will send the required amount to the IRS and release the rest of the money directly to you, the seller.
The U.S. Citizen’s Dilemma: Escaping Your Home State’s Tax Reach
For U.S. citizens living in one state while owning property in Florida, the tax challenge is completely different. The federal FIRPTA law does not apply to you . Your problem is not with the IRS withholding your money, but with your home state’s department of revenue trying to tax your profit.
Why Your New York Address Means New York Taxes on Your Florida Profit
Most states with a personal income tax, such as New York, California, New Jersey, and Illinois, tax their residents on their worldwide income. This means that if you are a legal resident of New York, New York’s government has the right to tax all of your income, no matter where in the world you earned it. This includes the capital gain from the sale of your Florida property.
Because Florida has no state income tax, there is no tax credit available to offset what you owe to your home state. You will pay the full federal capital gains tax to the IRS and the full state income tax on the same gain to your state of residence. This results in a significant and often unexpected tax burden that can erase a large portion of your profit.
| The Action | The Tax Outcome |
| A legal resident of California sells their vacation condo in Naples, Florida, for a $200,000 profit. | The seller owes federal capital gains tax to the IRS on the $200,000 gain. They must also report that same $200,000 gain on their California state tax return and pay California income tax on it, which can be as high as 13.3%. |
The Domicile Switch: Your Audit-Proof Plan to Become a Floridian
The most effective strategy to legally avoid paying state income tax on the sale of your Florida property is to change your legal domicile to Florida before you sell the property. By becoming a bona fide Florida resident, you are no longer under the tax jurisdiction of your former high-tax state when the sale occurs. This move can save you tens of thousands of dollars in state taxes.
However, this is not as simple as getting a Florida driver’s license. Your former state has a strong financial incentive to fight your claim and will often conduct aggressive residency audits. The burden of proof is entirely on you to show that you have permanently abandoned your old home and established Florida as your new one. Domicile is legally defined as your one true, fixed, and permanent home—the place you intend to return to whenever you are away.
You must build a powerful case with clear, documented evidence. The goal is to sever as many ties as possible with your old state while simultaneously establishing deep roots in Florida. A single lingering connection, like claiming a resident property tax break in your old state, can be enough for an auditor to invalidate your move.
| Do This in Florida | Don’t Do This in Your Old State |
| ✅ File a Declaration of Domicile with the county court. This is a formal, sworn statement of your intent. | ❌ Keep Your Old Driver’s License. You must surrender it when you get your Florida license within 30 days of moving. |
| ✅ Apply for the Florida Homestead Exemption on your primary residence. This is one of the strongest proofs of domicile. | ❌ Claim Any Resident Tax Breaks. Remove any primary residence or homestead-style exemptions on property you still own in your old state. |
| ✅ Register to Vote and Actually Vote in Florida. Your civic participation is a key indicator of your new home. | ❌ Spend More Than 183 Days There. Many states have a “statutory residency” rule that will automatically tax you if you are physically present for more than half the year. |
| ✅ Move Your “Near and Dear” Items. Transfer sentimental valuables like family photos, art, and heirlooms to your Florida home. | ❌ Keep Your Primary Bank Accounts There. Open new primary checking and savings accounts in Florida and move the contents of any safe deposit boxes. |
| ✅ Update All Legal and Financial Documents. Change your will, trust, and powers of attorney to be governed by Florida law, and update the address on all accounts. | ❌ Leave Your Professional Life Behind. Transfer professional licenses and change the address on national club memberships to a Florida chapter. |
Choosing Your Armor: How to Own Florida Property for Maximum Advantage
The way you choose to hold title to your Florida property is a critical decision that should be made at the time of purchase, not at the time of sale. For a foreign investor, the choice of ownership structure creates a fundamental conflict between two competing goals: minimizing U.S. income tax when you sell versus avoiding U.S. estate tax when you die.
The Great Debate: Avoiding Estate Tax vs. Minimizing Income Tax
The U.S. imposes a federal estate tax on the U.S.-based assets of deceased foreign nationals. Unlike U.S. citizens who have a multi-million dollar exemption, a foreign national has only a tiny $60,000 exemption . Any value above that amount is subject to an estate tax of up to 40% . This can be a financially devastating blow to your heirs.
The problem is that the ownership structures that are best for income tax purposes (offering low capital gains rates) are the absolute worst for estate tax purposes. Conversely, the structure that completely avoids the estate tax forces you to pay a higher income tax rate when you sell. There is no perfect solution, only a strategic trade-off based on your priorities.
Comparing Ownership Structures: A Head-to-Head Analysis
For foreign investors, there are three primary ways to own Florida real estate, each with a distinct set of pros and cons. Understanding these trade-offs is essential for protecting your wealth across generations.
| Ownership Method | Pros & Cons |
| Direct Individual Ownership | Pro: This is the simplest and cheapest method. When you sell, your profit is taxed at the lower long-term capital gains rates (0%, 15%, or 20%). Con: This structure offers zero liability protection and, most importantly, exposes the property’s full value to the 40% U.S. estate tax above the $60,000 exemption. |
| U.S. Limited Liability Company (LLC) | Pro: An LLC provides a strong liability shield, protecting your personal assets from lawsuits related to the property. For tax purposes, a single-member LLC is “disregarded,” meaning the profit passes through to you and is taxed at the lower individual capital gains rates. Con: An LLC does not solve the estate tax problem. The LLC interest is considered a U.S. asset and is fully subject to the 40% estate tax, just like direct ownership. |
| Foreign Corporation | Pro: This is the only common structure that completely avoids the U.S. estate tax. Your heirs inherit the stock of the foreign company, which is not a U.S. asset, so no estate tax is due. Con: When the corporation sells the property, the gain is taxed at the higher U.S. corporate income tax rate (currently 21%) instead of the preferential capital gains rates. This structure is also more complex and expensive to maintain. |
The consequences of this choice are most profound at the time of death. An improper ownership structure can force your heirs into a fire sale of the property just to pay the massive U.S. estate tax bill.
| Ownership Choice | Result for Heirs |
| A foreign investor buys a $1.5 million Florida vacation home in their own name. Upon their death, the property passes to their children. | The property is subject to U.S. estate tax. After the $60,000 exemption, the remaining $1,440,000 is taxed at up to 40%, creating a tax bill of over $500,000. The heirs may be forced to sell the property quickly to pay the tax. |
Mistakes to Avoid
Navigating the sale of Florida property as a nonresident is filled with potential pitfalls. A single error can delay your closing, trap your funds with the IRS, or trigger an unexpected and expensive tax bill. Here are the most common mistakes and how to avoid them.
- Waiting to Apply for an ITIN. A U.S. Individual Taxpayer Identification Number (ITIN) is mandatory for a foreign seller to file a tax return or apply for a withholding certificate. The application process can take several months. Solution: Apply for your ITIN using Form W-7 the moment you decide to invest in U.S. property, long before you plan to sell.
- Misunderstanding the Buyer’s Residency Affidavit. The 0% and 10% FIRPTA withholding exceptions depend entirely on the buyer’s intended use of the property as their primary home. A seller cannot force a buyer to sign the required affidavit. Solution: Never assume an exemption will apply. Discuss this with your real estate agent early and have a plan to file for a withholding certificate if the buyer cannot or will not sign the affidavit.
- Filing Form 8288-B Too Late. The withholding certificate application must be filed on or before the day of closing to be valid. Given the 90-day processing time, waiting until the last minute ensures your funds will be held. Solution: File Form 8288-B as soon as you have a binding sales contract.
- For U.S. Citizens, Not Severing Ties Completely. When changing domicile to Florida, keeping a driver’s license, voter registration, or primary bank account in your old state can be used by auditors as proof that you never truly left. Solution: Be meticulous. Use a checklist to systematically move every aspect of your financial, legal, and personal life to Florida and cut ties with your former state.
- Ignoring U.S. Estate Tax Exposure. Many foreign investors choose to own property in an LLC for liability protection, wrongly believing it also protects them from the 40% U.S. estate tax. It does not. Solution: Decide your priority at the time of purchase. If avoiding estate tax is the primary goal for a high-value property, use a foreign corporation structure despite the higher income tax rate on sale.
Frequently Asked Questions (FAQs)
Q: As a foreign seller, if I sell my Florida property at a loss, do I still have to deal with FIRPTA? A: Yes. The 15% withholding is based on the gross sale price, not your profit. You must apply for a withholding certificate before closing to prove the loss and reduce the withholding to zero.
Q: I am a Canadian citizen. Does the U.S.-Canada Tax Treaty eliminate the FIRPTA withholding? A: No. The treaty does not eliminate the withholding requirement. However, it prevents double taxation by allowing you to claim a foreign tax credit in Canada for the capital gains taxes you pay to the U.S..
Q: Can a nonresident use a 1031 Exchange to defer capital gains tax on a Florida property? A: Yes. A foreign investor can use a 1031 “like-kind” exchange to defer federal capital gains tax, but it must be for another U.S. investment property and follow very strict rules and timelines.
Q: Do I need a U.S. tax ID number (ITIN) to sell my Florida property as a foreigner? A: Yes. An ITIN is absolutely required for a foreign seller. You need it to file for a withholding certificate and to file the necessary U.S. tax return to report the sale and get your refund.
Q: As a U.S. citizen living in New York, if I move to Florida, how soon can I sell my property to avoid New York tax? A: You must sell the property after you have successfully and demonstrably changed your legal domicile to Florida. The timing is critical, as selling while still a New York domiciliary will trigger New York tax.
Q: Besides capital gains, are there any other Florida taxes when I sell property? A: Yes. Florida charges a Documentary Stamp Tax on the deed transfer. The rate is typically $0.70 per $100 of the sale price and is usually paid by the seller at closing.