USA Law and Practice Contributed by: Richard L. Rosen, Leonard S. Salis and Dennison Marzocco, Rosen Karol Salis PLLC
8.3 Municipal Taxes Some jurisdictions impose taxes on commercial leases. For example, New York City imposes a 6% “commercial rent tax” on businesses renting space in Manhattan (below 96th Street) with an annual rent of USD250,000 or more, resulting in a 3.9% effective rate after a 35% reduction in base rent. While Florida used to impose a statewide commercial sales and use (rent) tax on tenants of 2% on the total rent charged under a lease or license to use commercial real property, this tax was abolished for rental payments covering peri - ods on or after 1 October 2025 (rent payments made for periods prior to 1 October 2025 remain taxable, even if paid later). The prior tax, however, remains in effect, with respect to certain specific, non-com - mercial or specialised rentals, including short-term residential rentals (less than six months), parking or storage for motor vehicles, boat docks/storage and aircraft hangars. 8.4 Income Tax Withholding for Foreign Investors There are three primary types of withholding taxes that apply to foreign investors. • The Foreign Investment in Real Property Tax Act of 1980 (FIRPTA), which imposes a tax on gains from the sale of real property by foreign sellers, requires that the buyer serve as a “withholding agent” to retain and remit 15% of the purchase price paid to the seller to the Internal Revenue Service (IRS), unless the seller provides proof of its non-foreign status, typically by providing a sworn Affidavit of Non-Foreign Status from a principal of the seller. • Any US partnership that generates income in con - nection with a US trade or business (“effectively connected income” or ECI) must pay a withholding tax on any ECI that is allocated to a foreign part - ner. The tax withholding rate is 21% if the foreign partner is a corporation and 37% if the foreign partner is a non-corporate taxpayer. Also, a buyer of an interest in a partnership that is engaged in a US trade or business is required to withhold 10% of the purchase price paid to the foreign seller. • Foreign individuals must pay federal income tax on long-term capital gains at a preferential maximum rate of 20% if the real property was sold after a holding period of at least 12 months, or a maxi -
mum rate of 37% if such property was held for less than 12 months. Foreign corporate sellers are subject to income taxes equal to 21% of the gain from the sale of the real property, regardless of how long the property was held. Foreign corporations may also be subject to a “branch profits tax” at the rate of 30% (or less, if provided in an applicable treaty) of the after-tax earnings from a US trade or business, to the extent that such earnings are not reinvested in the US branch assets. For rental income, a 30% withholding tax on gross rental payments is typically required, though this can be reduced by electing to treat the income as effec - tively connected with a US trade or business. 8.5 Tax Benefits As an incentive for the ownership and development of real estate in the United States, the US tax code pro - vides owners of real estate with certain tax benefits. • Real estate investors are permitted to deduct up to 20% of net (qualified) rental income through the Qualified Business Income (QBI) deduction. This deduction lowers taxable income for pass-through entities such as sole proprietorships, partnerships and LLCs provided the rental activity qualifies as a business. • Real estate investors are permitted to depreci - ate the costs of buying and improving a building (excluding the land, which is not considered a “depreciable asset”) in order to reduce taxable income over a period of up to 39 years. However, taking such deductions reduces the owner’s cost basis in the property, which becomes relevant, and is likely to result in increased capital gains taxes, when the property is sold. Through the use of cost segregation, a strategic tax planning tool, real estate investors may accelerate depreciation deductions, increasing immediate cash flow by reclassifying structural components into shorter- lived categories rather than the standard 27.5 or 39 years. • Section 1031 of the federal tax code permits own - ers of real estate held for investment to defer pay - ing capital gains tax if the proceeds from a sale are reinvested in a “like-kind” property within a speci -
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