Come and Visit…But Do Not Stay Too Long!

It is fairly well known that United States Citizens and Green Card holders are subject to taxation in the United States on their worldwide income (with few exceptions). However, it is generally less well known that substantial presence in the U.S. can also lead to taxation in the U.S.

The formula used to determine whether presence in the U.S. leads to taxation is as follows:

Add all of the days in the present year to 1/3 of the days of the prior year and 1/6 of the days from two years ago.

As a rule of thumb, substantial presence is reached if one spends 122 days in the U.S. for any three consecutive year period (122 + 122/3 + 122/6 = 183 days).

To prevent taxation under the above formula, one may be able to certify a closer connection to the home country to the Internal Revenue Service thereby requesting that one not be subject to taxation in the United States.

This certification is not possible for anyone who exceeds 182 days in the current year or if one has taken affirmative steps to becoming a legal permanent resident (i.e. by participating in the “green card lottery”).

In such cases, relief may still be possible under an income tax treaty, although such relief may be limited as information returns and foreign bank account reports must still be filed.

As the new year approaches it is important to take steps to properly plan trips to avoid unintended consequences.


Disclaimer: This article is for general information only and is not intended as legal advice.

Unanticipated Snag when Trying to Close a Probate

The heirs of a non-resident of the United States who owns real estate in Florida are oftentimes burdened by the need to go through probate in the State of Florida either by probating a German or Florida will or by defaulting to the intestacy Statutes. Oftentimes, once the probate process is opened, other problems surface related to estate taxes.

Many times the deceased will not owe any U.S. Estate taxes by virtue of the Estate Tax Treaty between the U.S. and the home country of the decedent, if their worldwide assets do not exceed the U.S. Unified Credit amount (for 2015 this amount is $5.43 Million). However, the decedent will only receive the Unified Credit if the Estate files an Estate Tax return, affirmatively claiming treaty relief.

Failing to do so will result in the application of the standard non-resident Unified Credit amount of $60,000. This means that any estate of a non-domiciliary decedent that has U.S. Assets in excess of $60,000 must file an estate tax return before the personal representative can sign the Affidavit of No Estate Tax Due.

Failure to file the required returns means that the Personal Representative will remain personally liable for any taxes that should have been paid to the Federal Government and any transfer to the heirs is potentially subject to claw-back.

Disclaimer: This article is for general information only and is not intended as legal advice.

Significant Tax Law Changes

Congress recently enacted the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015. This bill contains a number of significant changes to the Internal Revenue Code and the Bank Secrecy Act.

One change such significant change is the adjustment of due dates of various tax returns and for the Foreign Bank Account Reporting Form (“FBAR”) for all tax year beginning after December 31, 2015. Under the new law, calendar year Partnership and S-Corporation returns must be filed by March 15th of the following year. Personal and Corporate returns, as well as FBARs generally must be filed by April 15th. Each of these due dates can be extended by up to six months upon request.

Another significant change is that the bill overturns the Supreme Court’s decision in Home Concrete v. United States, 132 S.Ct. 1836 (2012). In that case, the Court held that in order for the six-year statute of limitations to apply (instead of the normal 3 year statute), a taxpayer must have omitted 25% or more of his income. Under the old rules, this meant that overstatement basis (which lowers gains) did not increase the statute of limitations to six years.

The new law explicitly overrules this case by including an overstatement of basis in the definition of the omission from gross income.

Disclaimer: This article is for general information only and is not intended as legal advice.

Foreign Banks Demand FATCA Forms

Over the last few months, many Germans living in the United States and even some who merely have a vacation home here started receiving letters from their non-U.S. banks, pointing out that under the Foreign Account Tax Compliance Act (FATCA) the banks are obligated to verify certain client information to comply with their reporting requirements under FATCA.

In their letter, the banks often enclose a variation of Form W-8BEN or W-9 and sometimes both. This has led to much confusion because the bank’s customers are not familiar with these forms and their significance. Many end up filling out both Forms or, alternatively, none at all.

Both Forms W-8BEN and W-9 are used to verify certain basic information, such as names, addresses and United States tax ID numbers (if one exists).

The significant difference is that Form W-9 is used to certify that the signer is a U.S. Person within the meaning of the Internal Revenue Code and will result in the reporting of the income, by the bank, to the Internal Revenue Service

Form W-8BEN on the other hand, certifies that the person is a non-U.S. Person and therefore (usually) is not subject to information reporting by the banks. Failure to return the appropriate Form to the bank will result in the customer being classified as a recalcitrant account holder which will result in the bank withholding 30% of the income and transmission of such amount to the IRS.

It is therefore very important that the bank’s customers timely complete the correct form to avoid complications down the road.

Disclaimer: This article is for general information only and is not intended as legal advice.

Probating a German Will

Many times, residents of Germany who own property in Florida believe that their will from Germany can probate assets located within the State of Florida. While it is possible, there are many potential pitfalls.

A will that is valid in Germany, may not be valid within the State of Florida. One example is a holographic will which may be valid under German law but will only be recognized under Florida law if it was signed before two subscribing witnesses.

If the will does meet the statutory requirements and the decedent is a domiciliary of Germany, the court will normally admit the will into probate and is required to order the Personal Representative to distribute assets to those entitled to assets under the laws of the foreign jurisdiction. Should a Will not meet the requirements of Florida law the answer may be significantly different.

Also, a certificate of inheritance from an Amtsgericht in Germany is not, without more, valid to transfer property within the State of Florida. Instead, this certificate, together with a translated, certified copy of the will, court docket transcript and death certificate must be filed along with a petition for probate administration with a court of proper jurisdiction within the State of Florida.

It is therefore vitally important to plan ahead to setup an estate plan that will properly protect those left behind.


Disclaimer: This article is for general information only and is not intended as legal advice.

New Disclosures for Real Estate Transactions

In response to the financial crisis, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010 to curb perceived consumer abuses by the financial industry. The result was a new set of forms, collectively called the TILA/RESPA Integrate Disclosure, which will be required for the majority of real estate transactions after August 1, 2015 involving consumer loans (i.e. mortgages).

In the past, transactions, involving a lender, required that the lender provide a loan disclosure to the consumer (“Truth in Lending Disclosure”) and a Good Faith Estimate of the expenses the buyer was expected to incur as part of the transaction. At closing, the closing agent prepared the Housing and Urban Development Form 1 (“HUD-1”) which reconciled the actual closing costs with the GFE while also providing a summary of the whole transaction.

The new rules provide that a statement called a Loan Estimate be given to the buyer no later than three days after receipt of a loan application from the consumer and no less than 7 days before closing. This statement is required to detail all expected closing costs.

Then, at least three days before closing, the lender must provide a Closing Disclosure to the Consumer which details the actual closing costs. If there are differences in the amounts shown on the Loan Estimate and Closing Disclosure, the lender may be required to provide a credit at closing to make up for the difference.

Consumers and Real Estate Professionals should be aware that implementation of the new system may complicate and possibly delay some closings and thus should work with their Title Agents to coordinate these new requirements.

Disclaimer: This article is for general information only and is not intended as legal advice.

Vacation Homes Registration as a “Hotel?”

The main legal questions that arise when purchasing a vacation home usually relate to taxes. Most people are aware of the competing burdens places on home owners by the income tax and transfer tax regimes (i.e. Estate and Gift Taxes) and thanks to realtors and tax preparers, most homeowners are also aware of other types of taxes. (see: Taxes, Taxes, and More Taxes.)

Less well known are compliance issues related to Chapter 509 of the Florida Statutes. These Statutes treat transient vacation home rentals similar to rentals of hotel rooms if such homes are rented (or are offered to rent) three times per year for a period of less than 30 days.

Most Vacation homes are advertised as available for rent on a weekly basis. Thus, unless there is a limit of 2 short term rentals per year, most vacation homes fall under the purview of Chapter 509. This has several far-reaching effects.

The main downside of falling under Chapter 509 is that each vacation property must be registered with the Florida Department of Business and Professional Regulations and pay the registration fees. The Department has the authority to then regulate such registered properties (i.e. through Regulations related to sanitation standards, inspections etc.).

The main upside of falling under Chapter 509 is that these Statutes make is much easier to evict unwanted guests who have overstayed their welcome through police action instead of a drawn-out legal action.

Disclaimer: This article is for general information only and is not intended as legal advice.

Taxes, Taxes, and More Taxes

Many new vacation home owners know that there are a lot of taxes levied at various levels of government, but may not be aware of exactly what types of taxes are assessed.

Here is an overview of the various taxes that may be relevant to a vacation home owner who engages in short-term rentals in the State of Florida:

The first tax that most people are aware of are property taxes. They are calculated annually by the county, based on the millage rate determined by the County Commissioners and the value of the property determined by the Property Appraiser. The value is based on a comparison of the subject property to other, similarly situated properties (although there are a number of modifiers). The assessments are sent to the owners before the end of the year and they can be viewed on the Internet. These taxes can even be paid online.

A lot less straightforward tax is the Tangible Tax. This is a tax levied by the County and is based on the value of tangible property used in a trade or business, which also includes rental properties (such as furniture, appliances, etc. included in the rental unit by the landlord for use by the tenants). The first $25,000 value is exempt from taxation but only if a timely return is filed in the first year that the property became subject to taxes.

Next, the Counties assess Tourist Development Taxes on short term rentals. The rates are fixed by each county (i.e. Lee County currently assesses a 5% tax while Collier County assesses a tax of 4%). Additionally the State of Florida imposes a sales tax on short-term rentals at 6%, however, most counties also add a discretionary surcharge so that the sales tax percentage may be higher.

Finally, in the case of a non-resident alien, the federal government levies income taxes on rental income either at a flat rate of 30% of the gross rental amount or, if a timely election is made, calculates graduated tax rates on the net income earned.

Disclaimer: This article is for general information only and is not intended as legal advice.

Estate Planning through a Trust

A revocable living trust is a creature of State law which is similar to a Will. It is a very flexible instrument which, upon the death of one or more Grantors (in case of a married couple), makes it very simple for the successor trustee to management the property held in trust. Generally speaking, this is an instrument that is free of court supervision and does not require court management, unless a dispute arises. Thus, the assets can be managed seamlessly after the death of the grantor with a minimum of interference.

Another large advantage is that, generally speaking, the assets in the trust do not have to go through a formal probate administration. Thus the deceased can save on the fees for the probate attorney and personal representative which can hover near 6% of the gross estate or may even exceed that amount. Additionally, trusts are private documents that are not published in the public records, contrary to a will, which would need to be filed with the courts upon the death of the testator.

The trust is also very flexible so that minor beneficiary’s shares in the trust property can be managed by the trustee until those beneficiaries reach the age of majority without the need of a guardian. This type of benefit also holds true for assets held in a “spendthrift trust” which may shelter assets on behalf of beneficiaries with financial difficulties from claims of creditors.

A trust, similar to a will, costs a fee to set up but then there are no regular fees to maintain the trust. However, it is advisable that the grantors reach out to the drafter on an annual basis to make sure that there are no significant changes to the law that would prompt an amendment in the document to preserve the grantors’ intended purpose of the trust.

Disclaimer: This Article is meant to provide general information only and is not intended to be used as legal advice.

Lack of Knowledge May Not Be a Defense for Much Longer…

One area of concern for U.S. Persons (generally those who meet the substantial presence test, Green Card holders, and U.S. Citizens) that has recently received a lot of attention, is the requirement to declare worldwide income, file U.S. income tax returns and the requirement to file various information Forms, including the Foreign Bank Account Reports (“FBAR”).

Those who have failed to file the required forms or report the required income have some options to become compliant. However, during a joint Internal Revenue Service, Criminal Investigation Division, and Department of Justice speaker panel at the 33rd Annual Miami International Tax Conference, the government has indicated that they are starting to closely scrutinize those who claim ignorance of these rules in light of all the publicity this topic has received over the last several year. Based on their comments, it appears that we may be approaching a point where the ignorance defense may be harder and harder to believe.

Further, based on repeated comments about the transient nature of the current compliance programs, in light of the foreign reporting requirements pursuant to the Foreign Account Tax Compliance Act (“FATCA”) and the Global Reporting Standard (a/k/a “Global FATCA”) it appears that the government may be considering the termination of these programs, without warning, in the no too distant future.

Thus, if you have been remiss in my your compliance with your reporting requirements, you should not delay consulting with an attorney to discuss your options.

Disclaimer: This Article is meant to provide general information only and is not intended to be used as legal advice.