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Foreign Purchase of Real Estate?

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According to HousingWire.com, foreign purchase of real estate rose in the United States in 2017. The three states foreigners invested in housing the most were Florida, Texas, and California. Foreigners and recent immigrants, between April 2016 and March 2017, bought more than $150 billion in value in residential properties. Buyers from Canada led the surge. China was another leading investor.

Some of the restrictions on foreign purchase of real estate

Generally, the United States does not limit purchases of American residences by non-American buyers. In many ways, America encourages these events. Other countries aren’t so generous. There are countries that do restrict residential and commercial purchases to local investors.

The American restrictions are normally set by the owners of the property. Individual homeowners generally can’t restrict investment by foreigners. Homeowners whose ownership impacts others such condominium associations, coops, homeowners’ associations, and other local community groups may have bylaws that restrict ownership. Some groups such as condominium associations interview prospective owners to see if they like them.

Community associations usually incorporate their association to minimize liability.  They also incorporate to control who can own properties and who manages the properties. Generally, if someone belongs to a cooperative or other community home group, the owner must comply with the rules of the association. Homeowner associations prefer local residents because they worry the foreigner may not actually live in the property. Absentee ownership creates several problems. It can be harder to start legal cases against a foreign buyer.  Many people join homeowner associations for the friendships and it’s not possible to be friends with someone who isn’t there.

Still, in Florida, for example, absentee ownership is fairly common. Many people from other parts of America and other parts of the world often use the property during the warm winter months and then sublet or don’t use the property during the other seasons.

Financing foreign purchases of Florida residences

Obtaining a mortgage or getting loans to purchase Florida residences is normally legal though there are often practical concerns that make it more expensive. Mortgage companies and other finance companies want to make sure they can collect on their loan if the property goes into default. They’re usually concerned, in Florida, about the possibilities of damage from floods and hurricanes. It’s harder to serve legal papers on foreigners. There may be arguments about which laws apply – the laws of the United States or the country where the foreigner resides or is from. It can be difficult to seize foreign assets if repossessing the home doesn’t’ cover the amount of the loan.

For these reasons mortgage and loan companies often charge much higher interest rates on the foreign purchase of real estate than if the purchase was made by someone in America. Larger down payments are also often required.

How the real estate settlement is handled if the purchase is a foreign purchase?

Typically, a foreign investor will appoint someone through “power of attorney” to review and sign all the legal documents at the closing. That person is usually has the authority to handle any financial transactions – paying bills or receiving checks on behalf of the foreign purchaser.

Why taxes can complicate foreign purchases?

Purchases and sales of residences and commercial properties involve American taxes, Florida taxes, and may involve foreign taxes. Some of these tax considerations are as follows:

  • Rental income. If the foreign buyer is purchasing the home as an investment, then federal income taxes on any rentals from the property will likely be due.
  • Property taxes. While the foreign purchaser owns a Florida home, the buyer is normally required to pay local school and property taxes on the assessed value of the property. The amount of the tax is set by the local municipality. Where the foreign buyer lives, usually doesn’t’ affect the tax due.
  • Capital gains tax. If the foreign buyer holds onto the property for more than a year, then any profit from the sale of the home is subject to a United States federal capital gains tax. There are some exceptions the buyer should review with a Florida real estate lawyer. If the funds are for a new residence, that the buyer will live in, there may be an exception. There are also some investment steps that may help the foreign seller avoid or defer the capital gains tax.
  • Foreign tax considerations. Different countries have different tax treaties with the United States. An experience Florida real estate attorney reviews these treaties and obligations, sometimes with the help of a tax attorney. The treaty may affect the rate of payment and which country receives the payment.
  • Estate taxes. If the foreigner dies while owning the American property, his estate may be subject to U.S. taxes, depending on the value of the estate.

Additional tax considerations

Both buyers and sellers must comply with the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA). FIRPTA is mostly a way of ensuring that the IRS gets its money.

Very large down payments, according to investmentsinflorida.com may help foreign buyers avoid some taxes on income – mainly because other federal tax considerations like depreciation – may mean there is no income.

Using trusts to make the foreign purchases

Some foreign investors use a structure called a trust to buy the real property. A properly drafted trust can help reduce the income taxes due and can possibly avoid having to pay an American estate tax if the foreigner owns the property when he/she dies. Trusts involved complex tax rules.

 

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