International investment is on the rise in prime real estate markets all across the United States.
Foreign buyers purchased $153.0 billion of residential property from April 2016—March 2017,an increase from $102.6 billion during the previous 12-month period (April 2015—March 2016). In general, the US is very friendly to international buyers, and the process for home purchasing is quite similar to that of US buyers. That said, there are some basic practices here that any foreign buyer should understand ahead of time, and certain variations in the market that any international investor ought to know about. Tax policies, credit checks, and financing will all be slightly different for foreign buyers.
Common Real Estate Practices in the US
In the US, almost all new real estate listings are posted to the Multiple Listing Service – or MLS – within 24 hours of coming up for sale. This ensures that active listings are available to all agents, and differs from practices in many other countries, where buyers have to go from agent to agent to find a property. However, a number of listings in certain markets – the luxury market in particular – remain “pocket” or “quiet” listings. Hence, it is important to have a real estate agent working for you who is in the know about both MLS listings and pocket properties.
The sales commission in the US is almost always paid by the seller, and then divided between both the buyer’s and seller’s brokers and agents. Buyers here don’t pay to have an agent working on their behalf, therefore it is always advisable to work with an experienced agent like Brady Kroll who will protect your interests in the transaction.
Buying Your Home
To purchase a home, be ready to prove who you are. You don’t need to be a US citizen, but you do need an Individual Taxpayer Identification Number. This is a number assigned by the Internal Revenue Service to foreign nationals who need to file income tax returns, something you will have to do when buying real estate here. You will also need a valid foreign passport, or two or more current photo identifications such as a driver’s license, in order to verify who you are and your country of origin. Though property ownership isn’t tied to immigration or visa status, there are still rules about how long you can stay in the US, so if you’re not a citizen, check out US visa requirements before you purchase.
The Fun Part
There’s a wide range of real estate markets in the US, and you’ll want to do plenty of research and exploration to find the right one for your investment. Do you want an estate for horseback riding and hunting in Colorado, or do you want a stylish multi-million dollar condo in downtown LA or Manhattan? Whichever home or condo you choose to buy, it should be a reflection of your lifestyle. You don’t just want to purchase a property for the sake of owning a piece of the market – you want to find and secure a home that fits your exact needs. Have fun with the search, and talk to your agent about making the wisest investment.
Financing and Mortgages
Since the financial crisis in 2008, banks have significantly loosened their restrictions on financing each year, and are now lending to many international buyers. Qualified foreign buyers can generally obtain financing for properties with a 30% down payment though certain markets, such as Florida, require a 40% down payment. Check the specific state requirement where you plan to buy. Banks are happy to offer mortgages to foreign buyers, but they usually require a relationship with the customer that goes beyond just the mortgage. Some banks, such as HSBC (which does a great deal of foreign homebuyer financing) have a requirement that the buyer hold a $100,000 deposit with their bank. Banks often also want to see proof of 12 months’ reserves to cover mortgage payment, maintenance, and taxes, in addition to the $100,000 mentioned above. Edina Realty has relationships with a variety of different lenders, and we can help you find a lender and mortgage terms that best suit your needs. Please get in touch if you’d like more specifics on various financing options. Then again, you may not need financing – between April 2016 and March 2017, the NAR reported that 72% of non-resident foreign buyers made an all-cash purchase and 35% of resident foreign buyers paid all-cash.
International buyers will usually be asked to provide the following documents, so it’s a good idea to get them in order ahead of time.
Usually at least four references from credit sources will be required for mortgage loan applications. These documents must come from finance professionals such as accountants, bankers, or insurance officials. This is very important – in 2012, US realtors reported that most of the deals that fell through with foreign buyers did so because the buyers lacked adequate credit history
Proper Visa or Foreign Passport Copy
Double check to make sure these documents haven’t expired and aren’t expiring anytime soon.
Verification of Rent/Mortgage Payments
Proof of rent or mortgage payments are generally required for a period of at least one year before the application.
Proof of Employment
International buyers, just like US buyers, will be asked to verify their employment when applying for a mortgage.
Adequate Closing Funds
You will need to show that you can afford the purchase, as well as have funds on reserve to cover the full first year of payments, insurance costs, taxes, etc.
Every US lender requires borrowers to purchase homeowners insurance to protect the home from any potential damage and natural disasters. Insurance costs vary based on the size of the property and by state. Costs tend to be significantly higher in states prone to natural disasters, such as Florida and Texas.
Everything You Want to Know About Taxes
Tax liability is different for foreign nationals than it is for US residents. Here’s a quick breakdown of major distinctions:
• While federal tax on long term investments (holding property for over a year) is 15% for US residents, foreigners pay 30%.
• Under the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA), income tax is withheld immediately after a non US-resident sells property. The rate varies from state to state, but the federal rate is a flat 10%.
• The IRS requires a “Statement of Withholding on Dispositions by Foreign Persons of US Real Property Interests.” In addition, many states request a “Nonresident Real Property Estimated Income Tax Payment Form.”
• We recommended seeking the expertise of a professional tax accountant to provide assistance with these forms.
Consult a Tax Specialist in Your Home Country
An international buyer’s overall tax liability will also differ country to country based on the home country’s tax treaty with the US. Therefore, it’s best to consult a tax advisor in the buyer’s country of residence, who is familiar with the tax treaty and its provisions. The capital gains rate for US residents is 20% (if the property was owned for more than one year) but it could be higher if you are from certain countries. Check with a local tax specialist before you buy.
Rental Income 101
US law requires that the foreign nationals “elect“ to pay US income taxes on any net income earned from rental property. If this election is not made in a timely fashion – and the proper forms filed with the IRS – a tax of 30% of the gross rental income will be demanded. Even if the property owner is incurring tax losses initially and doesn’t owe any taxes to the government, he or she must still file their tax returns in order to make the “election” required by law.
Get the Most from Your Deductions!
The good news is that international buyers who finance their purchases with a 40 to 50% down payment will generally not pay income taxes on their rental income for the first 10 to 15 years, since the US is very generous when it comes to expenses that can be deducted from rental income. Mortgage interest, common charges, depreciation, property taxes, insurance, and amortization of closing costs can all be claimed as deductions against income, so in the early years your property will generate negative taxable income and you will not have any tax liability.
You do not have to be in the US to close the deal
When the property is official closed on and transferred to the new owner, the new owner does not need to be in the US. Instead, the owner can provide his or her representative (usually a broker) with “Power of Attorney,” and then the representative will close the deal on behalf of the new owner. This is a common practice and can be very convenient for the buyer who does not want to come back to the US for the closing. Talk to your realtor about that possibility if it may interest you.
Establishing an LLC
International buyers should ask themselves if it suits their interests to buy under the name of a domestic US company, or LLC (Limited Liability Company). Although there are benefits to buying through a LLC, such as tax incentives, certain treaties between a foreign country and the US can sometimes detract from those advantages. Foreign buyers should do their research ahead of time, and enlist the help of a tax adviser who specializes in international law.
Here are six things you should know about LLCs in the United States:
1. It takes one week or so to form an LLC.
2. The LLC has to be created in the same state as the property to be purchased.
3. The LLC is required by law to file local, state, and federal tax returns.
4. An LLC can include foreign nationals and US residents.
5. At the time of sale, property owners can sell or transfer shares of the LLC to a buyer.
6. A US-based LLC can be owned by a Foreign Corporation for additional benefits.
Tip – If You Want To Avoid the US Estate Tax
When a non US-resident dies, his or her estate will be taxed by the US government at roughly 45%. This can be avoided if the international buyer sets up a Limited Liability Corporation (LLC) – which owns the property – and a Foreign Corporation to own the LLC. Since the property in this scenario is owned by the Foreign Corporation, the US would not be able to tax it upon the death of the owner. This can be a huge tax savings and is not very expensive or time intensive to implement, especially if you solicit professional help.
Work With a Professional Real Estate Agent
It is to your great advantage to work with a US-based, professional real estate agent who has experience, training and expertise in helping international buyers. A knowledgeable real estate agent or broker will protect your interests, while making the property search and purchasing process as rewarding and efficient as possible.
Brady Kroll and Edina Realty will help in every aspect of finding that perfect home or investment property for you. We will help you find the most desirable properties available, whether on the open market or quietly listed – and then secure the best price and purchase terms on those properties for you as an international buyer.