Few transactions are as exciting in life as a real estate deal, whether you are purchasing a home, a vacation space, or investment real estate. Purchasing property abroad is often even more exhilarating, but is also riskier, regardless of whether the transaction is completed by a foreigner purchasing U.S. real estate or an American buying abroad. One does not know what one does not know.
One reason real estate deals carry extra risk is that they often involve a substantial amount of money. As such, the impact of any real estate deal on a family’s finances is significant, touching on all areas of estate, tax, insurance, and wealth planning. When such a transaction is completed abroad, immigration, currency exchange, and other issues come into play as well, adding further complexity. One would be well advised to attend to the details when purchasing property outside of one’s home country. Below you will find a quick summary of major issues.
Tax residence and domicile, often correlated with home ownership, will determine where and how you are taxed for income tax purposes. But there are other possible taxes to plan around as well, some of which may be unique to the country where the property is located. Complicating matters further is that you may be taxed both in the country of residence as well as in the country where the real property is located. Coordinating tax implications is key.
- Tax/legal residence
- Regular income taxes
- Taxes on rental income, if any
- Estate and-or inheritance taxes at death
- Capital gains when property is sold
- Gift taxes if property is transferred in life
- Property taxes
- Transfer, registration and any other similar levy
- Value added taxes generated in certain real estate transactions
- Employment and local social security taxes if you build or improve the property
It is important to consider the estate planning consequences of having an asset of significant value abroad, and perhaps as important, how a foreign estate plan can affect an estate plan in the home country. You want to avoid inadvertently revoking prior plans if that is not your intent.
- Need for a will or two: U.S., foreign and/or international
- Use of beneficiary designations
- Use of trusts
- Planning in jurisdictions that do not recognize U.S. trusts
- Use of powers of attorney
- Estate tax considerations
- Tax treaties
- Planning for disability
- Forced heirship rules
- Privacy issues
- Probate process
Insurance and Risk Management
Protecting a valuable asset often involves the purchase of insurance, although insurance is only one tool in managing risk. Proper tax and legal advice are very important risk management tools that should not be overlooked.
- Types of risks: liability (higher or lower exposure), different natural disasters, building materials, etc.
- Nature of risks, especially as compared to home country
- Types of policies that are available; title insurance?
- How to title property: individual, joint names, trusts, corporate structures, etc.
Acquiring real estate will alter the character and structure of your overall portfolio. Financing property purchased abroad is often a challenge. Local financing sources are frequently unavailable or if available, often less desirable as to terms and rates. Therefore, people look to other assets they own to raise the funds necessary to complete a deal. U.S. persons acquiring property abroad will often:
- Pay cash
- Margin a portfolio
- Sell investment portfolio assets
- Sell other real property
- Take out a Home Equity Line of Credit on U.S. property
Foreigners coming to the U.S. usually:
- Pay cash
- Sell portfolio assets
- Sell real property
- Use a margin loan on U.S. securities
Regardless of how you finance the purchase, there is an impact on overall portfolio diversification, liquidity, marketability and return characteristics. These changes to the portfolio will affect taxes, estate planning, and risk management considerations of a comprehensive plan.
Other Important Considerations
If the property is purchased abroad, it is important to take into account additional factors:
- Immigration Status
- Currency risk
- Political risk
Several jurisdictions around the world will give preferential immigration treatment to those who have purchased real estate in the country. That is not the case for the U.S. However, purchasing real estate in the U.S. may be a good indication of someone who intends to spend a significant amount of time in the country. Depending on circumstances, a foreigner coming to the U.S. may inadvertently become a tax resident or establish domicile (which is not the same as legal residence!).
Economic or political instability may cause the value of the property expressed in your functional currency to decline, affecting your net worth. Of course, the opposite can also be true. One reason that non-U.S. citizens purchase real estate in this country is precisely because they see the U.S. dollar as strong vis-à-vis their local currencies and the U.S. as more stable politically.
The purchase of real estate is a type of transaction that will impact all aspect of a financial plan in a significant way. Purchasing real estate aboard increases the complexity of any real estate transaction and of your financial life. Any planning that may have been done in the home country will need to be revisited since the plan will no longer work well (and in fact may be counterproductive) in an international context.
Copyright: rabbit75123 / 123RF Stock Photo