The United States is truly the home of the free. In contrast to many other countries, almost anyone is allowed to purchase property was in the US. This includes foreigners who want to invest in American properties. Contrary to popular believe you don't have to be a US citizen to buy property. Here will look at some of the factors that come into play when foreigners purchase property on U.S. soil.
One major hurdle that foreigners face is getting funding for their purchase. Yet, it is not uncommon for non-citizens to get loans through U.S. banks. However, many banks will charge higher interest rates to make the loan. They may also require a hefty down payment to cover the risk of the loan. Foreign debtors are risky for lenders because it is hard to recoup losses in the case of a default. Banks can have an extremely hard time attaching assets located abroad. Thus, although loan money is available, foreigners will have to pay a premium for the opportunity.
Tax Issues With Foreign Investors
Foreigners have to pay taxes for real estate transactions just like anyone else. Yet, the method of taxation is complex due to the application of competing laws. The typical buyer can be subject to taxation in their home country as well as the U.S. How this is dealt with depends on any applicable tax treaties and intergovernmental relations. It may be best to contact an experienced lawyer in real estate matters for advice on how to approach this.
Dealing With Capital Gains
Foreigners are subject to the Foreign Investment Real Property Tax Act. Thus, sales of U.S. based properties will suffer an automatic 10% deduction of the gross sales price. This amount is transferred to the IRS by the title company or closing agent. The intent behind this law is to ensure that foreigners remain responsible for their tax obligations. The withholding amount prevents foreigners from taking all the sale proceeds back to their home country to evade U.S. tax law.
Many foreigners wonder whether they should take title to the property in their own name, or through a business entity. Buyers who use their own name are subject to long-term capital gains taxes at a rate of 15% of the sale price. Yet, when a foreigner holding U.S. property dies, the value of the property beyond $60,000 can be taxed up to 45%. This is in stark contrast to the rule which applies to U.S. residents and citizens. Legal residents and citizens of the U.S. have a $2 million exemption. Thus, it is easier for Americans to avoid the estate tax and to transfer their asses to surviving relatives without being taxed.
Issues With Net Election
Foreign investors can take it advantage of net election when they file taxes on a timely basis. This gives them the opportunity to report only the net income derived from the property. However, in the case that the foreigner fails to file taxes on time, the net election may not be available. The end result will be a taxation amount of 30% of the gross rent. Furthermore, No deductions will be allowed for related business expenses. Failure to file taxes in a timely manner, or not filing at all, also creates problems when the owner wants to sell the real estate. The unreported losses will not be available to offset sale gains. Thus, foreign investors should keep a keen eye on U.S. tax filing requirements.
Foreign realty transactions should not be taken lightly. To get help from a real estate lawyer contact the law firm of Spencer and Collier, PLLC. Obtain a consultation at the Sandy law office to find out how Spencer & Collier can be of assistance.