Archive for Foreign Buyers

This week, we released our Second Quarter report for the Manhattan Residential Rental Market.  Manhattan Residential Rentals Market Overview Q3 2012 reported here and summarized below was prepared by Miller Samuel for Prudential Douglas Elliman.

“Brisk market pace continues as rental prices continue to rise and marketing time remains near a 20-year low”

  • Median rental price was $3,195, up 10.2% from $2,900 in the same period last year.
  • Net effective median rental price (after concessions) was up 8% over the same period.
  • Landlord concessions accounted for 2% of all rentals with an average of 1 month free rent.  This compared to 8.6% of all rents in the same period last year

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Jan
20

Enticing Foreign Investors – Buy a home get a Visa?

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Recnetly,  U.S. Senators Charles Schumer (D-NY) and Mike Lee (R-UT)  introduced a bill that would allow foreigners who spend at least $500,000 on residential property to obtain visas allowing them to live in the United States.  The “Visa Improvements to Stimulate International Tourism to the United States of America Act”, or VISIT-USA Act is similar to an existing program that puts foreigners on a fast track to a green card if they invest at least $500,000 in an American business that creates at least 10 jobs.

The legislation would create a new homeowner visa that would be renewable every three years, but would not be a path to citizenship.  There are a number of stipulations and restrictions, however:

  • To be eligible, a person would have to buy a primary residence of at least $250,000 and spend a total of $500,000 on residential real estate.  Other properties could be rented.
  • The purchase would have to be in cash, no mortgage or home equity loan allowed.
  • The property would have to be bought for more than its most recent appraised value
  • Buyer would have to live in home for at least 180 days each year, requiring paying US Income taxes on any foreign earnings.
  • Visa eligibility would be revoked if property was sold.
  • Work visas still must be obtained to hold a job.
  • Neither buyer nor dependents would be eligible to receive Medicaid, Medicare or Social Security benefits.

Some brokers say that a visa incentive to foreign buyers could potentially even triple sales in their markets. 

“California, Florida, New York, Colorado, Hawaii, and Texas — those states will see a huge increase in demand,” Sandra Miller, a broker at Engel & Volkers in Santa Monica, told the Los Angeles Times.

Source:  Los Angeles Times story

Categories : Buyers, Foreign, The Process
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Aug
18

The New 3.8% Real Estate Tax Is Coming

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Beginning January 1, 2013, a new 3.8% tax on some investment income will take effect.

It was passed by Congress in 2010 with the intent of generating an estimated $210 billion to help fund President Barack Obama’s health care and Medicare overhaul plans.

It’s complicated and difficult to predict how it will affect every buyer or seller.  The National Association of Realtors ® developed a brochure with examples and different scenarios

  • ·         Effective January 1, 2013, the 3.8% tax will affect some but not all income from interest, dividends, rents and capital gains.
  • ·         Only on individuals with an adjusted gross income (AGI) above $200,000 and couples filing a joint return with more than $250,000 AGI
  • ·         Applies to the Lesser of Investment income amount in excess of the AGI amount over $200,000 or 250,000

 Read more about it here.

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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

Foreign purchasers of Manhattan real estate often take title to the property through a legal entity rather than in their capacity as individuals. Some of the reasons they opt for this can be privacy issues, income tax deferral issues, gift/estate tax concerns, the need or desire to shield the foreign investor’s own assets from liabilities arising from the ownership of U.S. real estate, and whether it is expected that additional investors will acquire equity interests in the property.

It is imperative that prior to signing the contract of sale the foreign purchaser receives competent legal and international tax advice as to the proper structure to use in order to accommodate the investment.

Foreign purchasers should be cognizant of the fact that certain types of entities in which they want to take title may not be available to persons that are NOT citizens or permanent residents of the United States, such as an “S Corporation”. In using this particular entity the investor would soon discover for one, that it may not be available to them and that the income generated by the U.S. real estate would likely be subject to double taxation.

This post was taken from a tip written by Filippo Cinotti, Esq.and published in PDE Title’s Spring Newsletter. PDE Title is a sister company of Prudential Douglas Elliman Real Estate.

Categories : Foreign, Investors
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1 -The Numbers

  • Manhattan residential real estate has performed better than the broader U.S. real estate market.
  • Compared with losses of more than 40% for Los Angeles and San Francisco over the past few years, Miller Samuel reports in the third quarter 2009 Manhattan Residential Market Overview that the average price per square foot in Manhattan was $996 vs. $1289 as reported in the first quarter of 2008 , a price reduction of 23% from the peak.
  • Third-quarter 2009 data show prices declined at a lower rate while transaction volume surged 46%, a sign that the Manhattan market is starting to find its bottom.
  • As Donald Trump once said “It’s a water thing”. Manhattan is a landlocked island. While developers in most cities keep expanding outward, developers in Manhattan do not have this alternative.
  • Wall Street firms are expected to pay a record $140 billion in bonuses this year according to The Wall Street Journal. Regardless of whether these bankers deserve their lavish bonuses, their payday will boost Manhattan real estate prices.

2 -Capital of the World

  • Manhattan is a global must-see destination. Emerging markets like Brazil and China are creating wealth at a very high rate and churning out millionaires.
  • New York is often the first international destination new millionaires from emerging countries want to visit. It’s also one of the first places where they want to buy investment property or a pied-a-terre.

3- Diversity of Industry

  • Besides finance, New York has media, hospitality, advertising and professional services like law and accounting firms. These industries will be serving emerging-market economies and will benefit the local New York economy in terms of job creation and housing demand.
  • If not for the diversity of the current New York City economy, the unemployment rate would be even higher than 10.3% that was reported in August.
  • Sectors like education, health, leisure and hospitality have gained jobs, which partly offset the negative impact of the financial job losses.

4 -Quality of Life

  • New York City is one of the safest cities in the US.
  • The legal system is established and there is a better work-life balance compared with countries like China.
  • Transportation in Manhattan via the Subway system is efficient and reduces commuting time for those living in Manhattan.
  • The air in Manhattan is pristine compared to air in other global metropolises like Hong Kong.

Portions excerpted from NuWireInvestor reporting on a story written by Wei Min Tan of TheStreet.com

Flags of the worldThere is a common misconception that it is more difficult for foreign nationals than for American citizens to get a mortgage in NYC.  In fact, there are some restrictions, but it is perfectly possible for foreigners to get mortgages for New York City home purchases.

Foreign nationals obtain a mortgage like anyone else

Foreign nationals can approach local NYC banks, national lenders, credit unions and mortgage brokers to apply for a mortgage. Not all lenders offer foreign national programs, but they are readily available.

As a foreign national, one must be prepared to put a down payment as high as 40% of the purchase price—required by the lender because it typically will only loan 60-80% of the purchase price. Interest rates are reasonably priced and there are no forbidden property types so you can finance a condo and a co-op just as easily as a single-family home. Some lenders will require you to prove your Visa status or type of Visa you possess that gives you permission to be in the United States, be it for a business or a pleasure trip or to come to the U.S. to work, study, conduct business or immigrate.

Foreign nationals who hope to purchase co-ops will need to go before the co-op board, just as citizens do.  The co-op board may impose its own requirements such as requiring a green card, U.S. tax returns and other conditions. Co-op restrictions may make it more convenient for foreign nationals to purchase condos because the bylaws and rules of condo associations are typically less restrictive than those of co-ops.

If the purchase is strictly for investment purposes I would recommend the purchase of a condo. That said, in New York City, there are “condops” (a cross between a coop and a condo) which may allow you the flexibility as an investor but at a lower cost.

The bottom line is that a foreign national can obtain mortgage financing just like a The bottom line is that a foreign national can obtain mortgage financing just like a U.S. citizen would in order to establish a NYC mortgage. Find a lender that offers foreign national loans and apply for the mortgage. Then sit back and wait for information to be processed—just like a U.S. citizen would have to do.