If you are living outside the U.S. but considering a move stateside, you’re actually in luck. The housing market in the United States is extraordinarily friendly and convenient to any foreign persons who want to invest in property throughout the country. The American government doesn’t maintain restrictions or charge hidden fees, such as extra stamp duties, to a non-citizen seeking out a home or smart property investment in the country. In fact, the experience of home buying in the U.S. may not differ too wildly from the experience in your home country. That being said, there are four rules any foreign investor needs to keep in mind as they begin their search for property in the United States.
1. Look for Condos, not Co-ops.
Why choose a condo vs a co-op? Co-ops are intended to be primary residences, and the corporations that own them are highly motivated to deter foreign buyers from purchasing. They do this because they want primary home owners living in these apartments. There is a high chance that a foreign owner might decide to leave the property at some point and rent it out. This increases the transience in the building, exactly what they don’t want.
In addition, the corporations that own these buildings understand that if they sell to a foreign owner, their ability to hold the owner liable in court is different than if they sell to a US citizen. With the owner’s assets held outside of the U.S., even if the corporation were to sue and win a judgment, collecting on such a judgment when assets are overseas is next to impossible. This is why if you are a foreigner looking for US real estate, you need to seek condos or individual homes. Coops won’t be an option.
2. Elect to Offset Expenses Against Income for U.S. Income Tax Purposes
If you choose to buy a home or property in the States, you must submit a tax return at the end of every tax year. To take advantage of the generous tax treatment that the IRS allows for property investments, investors must elect to offset expenses from income. You do this simply by filing a tax return and making that choice (called an ‘election’). If you fail to file tax returns or make such an election, the IRS will automatically charge you 30% of the gross rental income. This can have a devastating effect on profits, as you’d be unable to deduct expenses like depreciation, common charges, property taxes, repairs, or interest.
It’s also important to note that because one can deduct depreciation (a non-cash expense) along with many other cash expenses, in the early stages of your investment, you will be showing tax losses on paper. Therefore, you would not owe the government anything. However, just because you have tax losses, the tax return still needs to be filed right away to choose that election.
3. Plan and prepare to avoid the Estate Tax (aka the Death Tax).
When a person in the U.S. dies, combined Federal and State taxes can rise to approximately 46% of their overall estate. For American citizens, this only applies to the wealthiest people. Their estate is exempt for the first $11.4 million ($22.8 million for married couples). A foreign buyer, however, is only exempt $60,000. This means that if an owner of US property has not planned for this, a death could result in a hefty tax - ultimately lost inheritance to one’s heirs. One strategy to avoid this hefty tax is to use a Foreign Corporation headquartered outside the US to purchase the property, instead of doing so individually or using an LLC to hold the property (which isn't enough to escape the estate tax). Another is to take out an inexpensive term-life insurance policy payable to your heirs to cover the tax if ever needed. It’s very easy for foreigners to escape the estate tax, so don’t let that deter you from a US property purchase. With every investment, proper planning is a must. Be sure to talk to us about this to see how our foreign clients structure their deals to minimize taxes.
4. Consult with home country tax specialists.
Most tax advice you read on our site, or on the internet, generally assumes that there is no tax treaty between the United States and your home country. However, it is possible that your home country has signed a deal with the US that allows for different tax treatment. Accordingly, you should speak speak with a local tax lawyer that understands whether there is a tax treaty between our two countries, and how such a treaty might affect you should you purchase an investment property overseas.
When it comes to investment opportunities, there are few countries as welcoming and kind to foreign investors as the United States. There are significant advantages investing in the US compared to many other countries, such as safety of investment. With some careful planning, one can avoid any additional taxes, fees or pitfalls that might be scattered along the way. Just be sure to consult Manhattan Miami and our talented team and resources—like our Foreign Buyer’s Guide—to ensure you’re finding the best property and advice.
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At Manhattan Miami Real Estate we specialize is helping International and domestic buyers locate and purchase exactly the homes they want, and do it at the right price. Whether you are looking for an investment property, primary home, an apartment for your child who is going off to Columbia or NYU, or looking to trade your investment property in NYC, we are here to help.