Dec
13

Foreign Investor? Some Considerations When Buying US Real Estate

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Recently with the devaluation of the dollar and the uncertainty of investments elsewhere around the world, many more foreign nationals have been interested in purchasing Manhattan residential real estate as an investment.

It is no more difficult for a foreign national to obtain a mortgage than for an American citizens buying in New York City if the residence is to be a primary residence (or at least a pied-à-terre). However,  an investor who is not prepared to pay in cash and wants to obtain a mortgage for a property that will be used as an investment (i.e. with rental income), will find it difficult or impossible to find a mortgage with low rates.

The foreign national buyer, in addition to putting together a search team including a real estate broker and a mortgage lender (if necessary), should search out a New York City attorney who may be able to help save thousands of dollars in taxes or at least alert you to the tax consequences of the purchase.

For just such an investor, I recently had the pleasure of working with Michael C. Xylas of Abrams Garfinkel Margolis Bergson, LLP. One of the partners, Neil Garfinkel, recently published an extremely informative discussion, very helpful to foreign buyers, summarized below and found in its entirety here.

Foreign investors are lured to US real estate by the stability and security of the US Real Estate market.  Generally they can enjoy a steady appreciation of US real property and without the volatility of financial markets, making the prospect of economic gain through rental income and capital growth the strongest attraction.  With relative political and economic stability in the US, there are fewer barriers to foreign purchase of US real property.  The weaker dollar and lower property prices make these investments even more attractive for foreign investors.

While easy to purchase as a foreigner, real property comes with reporting and tax consequences that must be considered.

“For the purpose of US Income Tax, a Foreigner or non resident alien (NRA) is an individual who is neither a US Citizen, a green card holder nor US Tax resident.  The test to determine if an NRA qualifies for the same status as a US citizen or resident individual is based on ‘substantial presence’.  This is defined by the number of days that one must reside in the US to achieve such status.   For the purpose of US Estate and Gift Tax, the test is more subjective, based on one’s intent of permanency in a particular country.  Importantly NRA’s are nevertheless subject to estate and gift taxes on any asset that are actually situated in the US.”

It is extremely important for foreign investors to work with a qualified team of legal, accounting and brokerage/valuation advisors who understand the rules in the foreigner’s home country as they correlate with the laws of the United States; if handled correctly, the transaction will be most suitably structured with consideration for investment, accounting and tax purposes.

Consider the Structure used to purchase the asset while planning your purchase:

  • Individual owner (Direct Ownership) and Single Member LLC
    • Real property used as a residence for personal use
    • Least complex
    • Required to file US Income Tax return
    • Estate Tax issues, Federal and possibly State
  • Shareholder in a domestic or foreign corporation
    • Domestic Corporation
      • Provides a liability shield
      • The Corporation is the taxpayer, eliminating the need for individual annual tax returns
      • Does not avoid US Federal estate tax liability
      • Two levels of tax imposed on corporation income:
        • Corporate level tax imposed
        • 30% withholding tax on dividends paid to individual owner/imposed (this could be lower based on a favorable tax treaty between the foreign investor’s country of residence and the US)
    • Foreign Corporation
      • Limits tax liability, mostly used to avoid US income tax as well as US estate tax.
      • Pass on US real property to estate beneficiaries without paying US  taxes
      • No individual US Tax return, however
        • 30% branch profits tax against the foreign corporation ‘dividend equivalent amount’ (regardless of any current distributions to the shareholders, the tax is imposed on corporation’s taxable income that is effectively connected to a US trade or business.
    • Foreign corporation which owns a US corporation
      • More complex structure, both foreign corporation and domestic US corporation are formed
      • Foreign Corporation owns the Domestic US corporation which owns the real estate asset.
      • more costly and complicated
        • Investor is provided a limited liability shield and does not file any US tax return
        • Federal estate and gift tax are not applicable
        • Branch Profits tax not applicable
        • Ultimate investor would be transparent
        • Income tax would be taxed at a less favorable rate compared to individual ownership

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