Buying and Selling Real Estate in the United States for Foreign Investors
According to the National Association of Realtors, international home buyers purchased $104 billion in United States real estate from April 2014 to March 2016. This number is up from the previous year’s $92 billion, and $68 billion from the year before, reflecting an ever-expanding world market. The top five countries investing in United States real estate are Canada, China, Mexico, India, and the United Kingdom. These countries accounted for over one-half of the properties purchased from 2014 to 2015 by foreign investors, and most foreign investors are buying property in Florida, California, Texas, and Arizona. Steadily increasing property values, favorable exchange rates, and demand for rental properties make the United States property investment tempting for foreign investors.
Foreign Nationals are allowed to purchase and own real estate in the United States as can LLCs, corporations, and partnerships. When buying real estate in the United States, there are very few differences between a foreign buyer and a buyer who is a United States citizen.
Real estate purchases in the United States vary by location since each state in the United States has its own set of rules regarding the purchase of real estate. Some of these rules and regulations affect items such as the type of contract used, the method of closing the sale, and the duties and titles of individuals involved in the sale process. In the United States, real estate listing information is shared by agents to promote transparency, unlike the process in many other countries where realtors or agents may have exclusive information regarding properties for sale. In the United States, sales commissions are paid by the seller, rather than the buyer. Further, United States Real Estate Agents must be licensed.
The purchasing process itself in the United States is relatively straightforward but can vary depending on the unique factors of each sale. Generally, the buyer will make an offer, and write up a contract, called a “purchase offer.” Writing up a legally binding real estate contract early in the process proves to the Seller that the Buyer is committed to moving forward. Next, there is a disclosure review, including a preliminary title report, city reports, and local documents. Then, an appraisal on the property is conducted, along with any necessary or elected inspections. The loan approval or commitment is generally secured after that, and once these elements have each been satisfied, the real estate closing is conducted to conclude the deal.
Closing costs can be negotiated in almost every real estate transaction in the United States. Often, there are guidelines as to which fees each party pays, but a motivated seller may occasionally offer to pay more fees to find a buyer more quickly. For example, in Florida, the Buyer typically pays for: (1) taxes and recording fees on notes and mortgages; (2) recording fees for deed and financing statement; (3) survey; (4) lender’s title policy and endorsements; (5) HOA or Condominium Association application and transfer fees; (6) loan expenses; (7) appraisal fees; (8) Buyer’s inspections; (9) Buyer’s attorneys’ fees; and (10) all property-related insurance. Similarly, in Florida, a Seller typically pays for (1) documentary stamp taxes and surtaxes; (2) owner’s policy and changes; (3) title search charges; (4) municipal lien search; (5) HOA or Condominium Association estoppel fees; (6) recording and other fees needed to cure title; (7) Seller’s attorneys’ fees; and (8) sales commissions. These closing costs and fees can be negotiated, and the parties can agree as to which party will pay what fees and expenses in the initial contract.
Beyond the basics of property acquisition in the United States, there are special considerations that foreign investors should be aware of before purchasing real estate. Many foreign investors question whether they need to be in the United States to close on a real estate transaction. Fortunately, at the “closing” of the real estate transaction, when the property’s title is transferred to the new owner, the new owner does not need to be present in the United States. Foreign Nationals investing in United States real estate can appoint a representative and sign a Power of Attorney so that the representative will have the right to close the deal on behalf of the new owner. This is a convenient way for foreign investors to purchase real estate in the United States without having to travel to the location of the property for closing. Another option is a “mail away closing” which involves the closing documents being mailed for signature in front of a notary public. However, a foreign investor may need to sign papers at a U.S. Consulate or a U.S. Embassy in order to obtain a U.S. Notary Public stamp.
Although a vast majority of sales of United States property to foreign investors is completed in cash without financing, banks are willing to mortgage United States property to foreign investors. Many qualified foreign investors can obtain financing with a thirty percent down payment.
Another consideration for foreign investors involves the likelihood of not needing to pay income taxes on any net rental income for the first ten to fifteen years of property ownership. Mortgage interest, common charges, property taxes, depreciation, insurance, and amortization of closing costs are all deductions against income in these first years of property ownership. When the real estate becomes profitable, some income may be offset by the prior year’s negative income. This offset, called “tax loss carry forward,” results in no income taxes needing to be paid for several years. Any foreign investor should consult with a tax specialist for their home country when considering a purchase of United States real estate. Overall tax liability varies from state to country, and a foreign investor’s tax liability may be different than that of a United States citizen depending on a variety of factors. A local tax attorney who is familiar with a foreign investor’s home country’s tax treaty with the United States, if one exists, would be able to guide a foreign investor through the tax implications of purchasing United States real estate.
Foreign investors may also consider deferment of United States capital gains taxes. Capital gains result when the selling price of a real property is higher than the purchase price. Capital gains are generally subject to a 15% tax for individuals and a 35% tax for corporations. Under Section 1031 of the IRS code, foreign investors can defer capital gains taxes. Section 1031 lays out a set of complex and demanding rules which must be followed precisely. Otherwise, the transaction will be disqualified for deferral. If successful, however, the foreign investor may sell the property without incurring any immediate tax liability. An attorney familiar with Section 1031 may help guide this process.
By: Carl-Christian Thier, Esquire