- You should have all of your clients visit with a CPA or tax attorney who has experience in working with foreign buyers before making a purchase.
- The PATH legislation makes significant changes to how real estate investment trusts are governed and to FIRPTA.
- Remember: It is illegal for you to provide tax advice.
As negative interest rates become more prevalent internationally, and currencies in many countries are being devalued, an increasing number of foreign buyers are looking for a haven for their money, particularly one that generates a return.
Purchasing property in the U.S. continues to be one of the most desirable ways for these buyers to achieve that goal, whether it’s for their children to attend school here, a personal residence or for their investment portfolio. Unfortunately, purchasing in the U.S. is fraught with financial pitfalls for the unwary foreign buyer.
According to Real Capital Analytics, foreign buyers invested $80 billion in U.S. real estate, representing about 16 percent of the total investment sales in 2015. If the current trend continues, that number will be even higher in 2016.
What every foreign buyer should do first
Working with foreign buyers is an entirely different game from working with American citizens or with those who are permanent U.S. residents.
The most important thing that you need to know is that these clients absolutely must visit with a CPA or tax attorney who specializes in representing foreign buyers before making any purchase. Failure to do so can have extraordinarily negative consequences.
The tax rules in California for foreign buyers are one of the most extreme examples of this danger. If your California buyer takes the title as an individual, up to 46 percent of all of his or her global income may be subject to California state taxes. In contrast, if they take title using an LLC owned by a foreign corporation, the result is usually no tax.
There’s a crucial caveat here. It is illegal for agents to give tax or investment advice to their clients. Even if you are a CPA, tax attorney or a licensed securities dealer, it’s still smart to avoid giving tax advice when you are acting as a real estate agent.
Drastically different lending requirements
Before you tell your foreign buyers about how great U.S. mortgage rates are, be advised that the lending game is entirely different for your foreign clients.
In addition to paying higher interest rates than Americans pay, lenders normally have the following additional requirements:
- A 30 to 40 percent down payment
- $100,000 on deposit at the bank making the loan
- One year of payments, taxes and insurance on deposit at that lender as well
With these requirements, it’s easy to under why so many foreign buyers opt to pay in cash. If your buyers do elect to obtain financing, in most cases they will get the best deal if they go through the financial institution where they conduct their business. It can also limit any concerns about money laundering as well.
Tax issues are huge
As noted in the example above, failure to take the appropriate tax planning steps before purchasing could cost your clients thousands of dollars in unnecessary taxes every year.
To illustrate this point, with proper planning before their purchase, your buyers can take advantage of the long-term capital gains rate of 15 percent.
They can also qualify for the mortgage interest rate deduction as well as be able to claim depreciation. In contrast, inadequate planning before entering into the purchase usually translates into a significantly higher tax bill.
Moreover, any individual who owns a property with a value exceeding $60,000 is subject to the death tax upon his or her death. Americans often circumvent this tax by setting up trusts, gifting their assets to their children over time or by using a LLC. Again, your clients should seek professional counsel on how to best minimize their tax liability.
Changes in FIRPTA
On Dec. 7, 2015, President Obama signed into law the Protecting Americans from Tax Hikes of 2015 (PATH) legislation. This law makes significant changes to how real estate investment trusts (REITs) are governed as well as making changes in the Foreign Investment in Real Property Tax Act (FIRPTA).
Investopedia explains that these changes should serve to attract more investment in U.S. real estate from foreign buyers.
According to the National Association of Realtors, FIRPTA requires foreign investors to withhold 10 percent of the purchase price and remit it to the IRS at the time of closing unless certain exceptions are met.
With the new law, the rate jumps to 15 percent for properties that sell for over $1 million. Please keep in mind that though the buyer is legally responsible for remitting these funds to the IRS, in certain circumstances the agent can be held responsible.
Remember: It is illegal for you to provide tax advice
Because there is no way you can know the exact tax ramifications for any buyer, it’s always smart to recommend that both your foreign and American buyers consult with a tax specialist when they first start looking for a property.
Furthermore, always keep in mind that a well-timed warning about the pitfalls of purchasing in the U.S. can be worth its weight in gold for your foreign buyers.
Bernice Ross, CEO of RealEstateCoach.com, is a national speaker, author and trainer with over 1,000 published articles and two best-selling real estate books. Learn about her training programs at www.RealEstateCoach.com/