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Which Caribbean Islands Have the Best Tax Rates for Vacation Homes?

A look at the Cayman Islands, U.S. Virgin Islands and St. Lucia

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Oscar Armelles / Getty Images
Oscar Armelles / Getty Images

Every week, Mansion Global poses a tax question to real estate tax attorneys. Here is this week’s question.

I’m a U.S. resident looking to buy a vacation home in the Caribbean. Which islands have the most favorable tax rates?

"Find a country where you enjoy spending time to buy a second house and don’t focus on taxes," advised Kevin Packman, partner at Holland & Knight law firm in Miami. "If you can avoid tax in one jurisdiction, but it isn’t a nice place, what is the benefit of being there?"

But if you know you want to purchase in the Caribbean, where many countries don’t have income tax, you should seek local counsel about property or real estate taxes in each jurisdiction, he recommended.

In addition, many countries, particularly those with access to beaches or an ocean, require foreign owners to take the title through an entity, Mr. Packman said. This entity needs to be reported to the U.S. Internal Revenue Service.

More:Your Island Home Is the Ultimate Getaway Paradise

Also, if you open a bank account to pay local expenses, fund improvements, accept rental payments, you may have to file additional IRS forms, depending upon the value in the account or the value of the real estate owned by the entity, he said. So be sure to advise your accountant of all foreign holdings.

Given all the above, Miles Plaskett, partner at the Miami law firm of Duane Morris, suggested three Caribbean islands for consideration:

The Cayman Islands. The islands have no income taxes, property taxes, estate taxes or capital gains taxes. But "stamp duties are payable on most legal transactions, including leasing and selling real property," he said. "The islands are very well developed and are sophisticated financial countries. Expect high prices–from $600,000 to in excess of $2 million on high-end property."

St. Lucia. There is no capital gains tax, nor is there land tax on property smaller than 10 acres. Property tax is 5% of the annual rental value of the residential property, Mr. Plaskett said, adding that a 2% stamp duty is levied on the market value of the property when it’s sold. Transfers of real property are assessed at a flat rate of 10%, he said. As for income tax, nonresidents are taxed on their earned income from St. Lucia at progressive rates, with the highest rate of 30% on income above US$11,111, he continued. "St. Lucia is a beautiful, picturesque island with up-and-coming markets in real estate investment and green energy."

More:What Are the Tax Implications for a U.S. Resident Buying a Second Home in the Country?

The U.S. Virgin Islands. "This is a sentimental favorite for me," said Mr. Plaskett, a Virgin Islands native. Real property is taxed at 1.25% of the property’s assessed value, "which is 60% of its actual value or fair market value for an effective tax rate of .75% of the property’s fair market value," he said. For a $1 million property, the real property tax rate would be 1.25% of $600,000 (60% of the assessed value), or $7,500.

In addition, the investment potential, especially on the larger island of St. Croix, is very good, and the islands are part of the United States, which makes investing easier, Mr. Plaskett pointed out.

Capital gains taxes range from 15% for taxpayers in the 25% to 35% tax brackets to 20% for those in the 39.6% tax bracket, Mr. Plaskett said. However, gains on property held for less than a year are added to your personal income and taxed at your ordinary income tax rate.

When you sell the property, you are required to withhold 10% of the selling price as tax. This is later credited as advance payment for capital gains tax.

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