Foreign Buyers Guide of US Real Estate

The US real estate market is very transparent, especially compared to many other countries. Closed sales transaction data becomes publicly available within 60 days after closing. In addition, agents are required to publicly post their exclusive listings within 24 hours, giving all agents access to inventory for sale.

Accordingly, a buyer doesn’t need to go from agent to agent to find a property. We have access to all homes and apartments for sale in New York City and Miami and can assist our buyers in the purchase of any one of them. Since we are well-connected real estate agents, we can help distinguished buyers find and secure the best properties, even when they haven’t been listed for sale yet.

Broker sales commissions are always paid by the seller (and then divided equally between both the buyer’s and seller’s brokers), so buyers don’t pay anything to have a buyer’s agent working on their behalf. This is called co-broking and represents over 80% of sale transactions in the US.

It is always advisable for a buyer to work with their own buyer agent and not the seller’s agent. This sounds elementary, but the sellers agent works for the seller! And, only the seller!  An Exclusive Buyer Agent will protect the buyer’s interests in the transaction. 

To deter foreign buyers, London, Hong Kong, Singapore, Vancouver, Melbourne and Sydney all impose an extra stamp duty (ranging from 7% to 30%of the purchase price) on non-residents purchasing property. That’s not the case in the US. Foreign buyers are treated equally as US buyers in this regard.

Foreign nationals must elect to pay US income taxes on any net income (rental revenues minus expenses) derived from rental property. If this election is not made in a timely fashion (for example, if US income tax returns not filed), a tax of 30% of the gross rental income will be assessed. Under this scenario, the investor would not be able to deduct any expenses, including depreciation, interest, property taxes, common charges, etc. Even if the Foreign Investor is incurring tax losses in the beginning years of their investment, and therefore doesn’t owe any taxes to the government, they still must file their tax returns in a timely manner to make the election.

When a non-resident sells US property, the Internal Revenue Service wants to be sure they get paid capital gains taxes. Accordingly, under the Foreign Investment in Real Estate Property Tax Act (FIRPTA for short), the IRS withholds 15% of the gross purchase price of the property. When a US tax return is submitted reporting the capital gains tax, if there is any refund due, that money will be refunded to the filer.

When a Foreign Buyer dies, his or her estate will be taxed by the federal government at close to 46%. While US citizens and Green Card holders are exempt for the first $6.03 million (with married couples exempt $12.06 million), non-US citizens are exempt only $60K. With some upfront estate tax planning, however, foreign buyers can either eliminate the tax or hedge against it.

Using a Foreign Corporation structure (that is, BVI, Cayman, etc.) as the vehicle to purchase a property, the foreign owner would not be subject to the estate tax. The owner would own shares in a foreign corporation, which are outside of US situs. Retail banks don't like lending to buyers using this structure, but some private banks will allow this. 

When our buyers don't have private banking relationships, they can still take advantage of investing in the US property market. However, to hedge against the estate tax, our foreign clients use a term life insurance policy (usually 10 years) to cover the potential tax. The low cost insurance policy is put in a trust and proceeds from the policy are used to cover the estate tax if one is charged. This way one’s heirs are protected in the event of death.

Depending on the home country of a foreign buyer, their overall tax liability may be different than that of a US resident, and may be higher or lower than other foreign buyers. This depends on the tax treaty a foreign buyer’s home country has signed with the US, if any. Consult with a local tax lawyer who is familiar with the specifics of your home country’s US tax treaty for clarity surrounding your specific tax liabilities.

The new owner does not need to be in the US at the closing of the transaction when the property’s title is transferred to the new owner. Rather, the new owner can provide his or her representative, usually their real estate attorney, with “Power of Attorney” to complete the transaction. Alternately, if purchasing with an LLC, a Letter of Consent achieves the same result of allowing a representative to close the deal on behalf of the new owner. This is quite common and convenient for the buyer who does not want to come back to the US for the closing. Generally, we would attend the walk-through of the property on behalf of the buyer right before closing.