Those who live and work overseas can invest in U.S. properties, although there are some considerations before deciding to do so. There are tax implications and difficulties in getting a reasonable rate for financing this type of purchase. Some areas could restrict investors who reside outside the United States as a part of their homeowner’s association rules, as well.
It could be a good idea to discuss your options with a real estate attorney in the state where you might invest and seek advice. A real estate attorney can explain the federal, state, and local statutes, tax codes, and regulations that will affect your U.S. purchase.
What to Know About Investing in Real Estate From Another Country
There is no citizenship requirement for real property sales in the United States. Those who live in other countries buy homes, land, commercial properties, and more in the United States daily. Here are some quick things to know as you consider investing in foreign real estate:
The State Where You’re Purchasing Real Estate Matters
Foreign-residing parties buy property in some states much more frequently than in others. For example, it is common for Canadians to invest in winter homes in some areas of Florida, California, or Arizona. They want to travel somewhere warm to reside during the harsh winter and purchase a second home in a warmer area of the United States.
Because of this, real estate lawyers in some areas are likely to be much more knowledgeable about the laws regarding foreign real estate purchases than others. However, finding the right firm to help you is a wise way to get answers to your questions.
Other reasons why foreign-residing parties sometimes want to buy a home or property in the United States include:
- As an investment, using it as a short-term vacation property or other rental property
- To establish residency for legal or tax reasons
- To have a place to stay near their business, loved ones, or a favorite vacation spot
In some cases, those from other countries seeking property in the United States live nearby. There are no rules restricting undocumented immigrants from purchasing land, although all the same considerations apply that would if they still lived in their homeland.
What to Think About When Purchasing Foreign Property
Some of the considerations international buyers must think about before purchasing a home in the United States include:
- Rules set by associations and co-ops
- Financing their purchase
- Tax implications of owning the property
A good option for help with these concerns is to work with a real estate lawyer in the area where you are purchasing property. They can represent your best interests and offer guidance.
Some Locations Discourage or Disallow Foreign Investors
While no state or national laws require citizenship or even residency to purchase property, this does not mean all areas welcome foreign investors. There are some areas where the homeowner’s association or another group actively seeks to prevent sales to those who reside outside the country.
In general, this is not based on prejudice. Immigrants who want to make the new property their primary home are generally welcome. Instead, the communities seek to prevent rental units, short-term rentals, or vacation homes from becoming commonplace. Usually, it is better for the community when the owner lives onsite.
The benefits of owners living in the community include:
- Short-term rentals often come with a lot of noise, partying, and other nuisances.
- Owners generally care for the property better than renters.
- People do not participate in the homeowner’s association or other community events when they are only there for part of the year.
- The community wants to remain a close-knit group of owners who all know one another and interact regularly.
- Rental units, especially vacation rentals, bring strangers into the area frequently.
- It is more difficult to contact owners about concerns when they do not live nearby.
For these and other reasons, some homeowner’s associations actively discourage foreign purchases inside their communities. Condominium associations sometimes go a step further and require the approval of new owners before a sale finalizes. This could make it extremely difficult to purchase a condo in certain areas unless you plan to live there most of the year.
You should review the homeowner’s association, co-op, or condo association by-laws for a property before you put it under contract. These stipulations could cost you a lot of time and money if you do not ensure the community permits the use you have planned for your new property.
Financing Can Cost Foreign Investors Much More
If you plan to purchase real estate in the United States with cash, the additional financing costs for foreign investors will not matter much. However, this is not the case for most buyers. They need to finance their purchase, whether that is a long-term mortgage or until they can sell other property to pay it off.
Financing real estate in the United States is often much more expensive for a foreign investor than it would be for someone already living nearby purchasing the same home. The banks charge significantly higher interest rates to protect their money.
This happens for several reasons:
- It is harder to collect on a debt when the debtor is in another country.
- Serving legal paperwork in other countries presents many challenges.
- Some countries prevent U.S. institutions from seizing a resident’s assets when they fall behind on payments.
- They worry the owner will abandon the property and not pay the debt.
- An absentee owner might not care for the property.
- It is more difficult to learn about the property’s condition after a natural disaster.
- Communication is more difficult, even if the loan gets paid on time.
In addition to higher interest rates, most banks and other financial institutions require much larger down payments from those who live abroad. They are willing to take less risk for foreign investors, making financing their real property purchase more expensive.
Of course, there could be exceptions to this rule. It might be possible to find a loan with a reasonable interest rate that fits your needs. If you plan to live in the home full-time, this could also affect the offer from the bank. Many people need to shop around for the best rate before deciding on and choosing a bank.
Understanding the Possible Tax Implications of Your Purchase
When purchasing real estate from another country, there are several ways that taxes could make the costs of owning the property increase exponentially. This depends greatly on your specific circumstances. To learn more, again, consider working with a real estate lawyer in the area you are property shopping. They can offer advice and guidance about federal, state, and foreign taxes.
An attorney familiar with these transactions can ensure your purchase complies with the rules established by the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA). They can also offer advice on how to help you reduce your tax burden in some ways. Lastly, they can guide you through the process of purchasing property with a trust, if this is an option that interests you.
Now, here are some key considerations about taxes on U.S. property:
Taxes on Rental Income
The federal government in the United States taxes rental income. If you invest in property to rent or use as a short-term rental vacation home, you will most likely need to pay federal income taxes on the profits from your investment. Your real estate lawyer can confirm this for you, and an accountant can manage the paperwork for you each year.
Property Taxes
Property owners generally pay property taxes. These taxes benefit the local city or county government, providing funding for schools and other similar operations. All property owners generally pay these taxes, regardless of the use of the home. Nonprofit organizations are one of the few exceptions. Each municipality sets its own taxes, and they vary widely. They are generally a percentage of the assessed property value.
Capital Gains Taxes
Capital gains taxes are not paid annually by the owner of a property. Instead, they are paid when you sell that property. This means they are unlikely to be a concern during your initial investment but still something you want to think about.
There are many tactics that help property owners avoid capital gains taxes, so this is an important one to discuss with your attorney before making the investment. These taxes are complex but often avoidable, especially true if you plan to live in the home.
According to the Internal Revenue Service (IRS), most taxed capital gains do not exceed more than 15 percent. However, this is still a significant payment when you sell an investment property.
Taxes in Your Country
In addition to federal and local taxes in the United States, you must consider how your home country handles taxes. Each country has its own system and agreements with the United States about these matters. There could be additional considerations based on your country’s tax burdens and the structure of its agreement with the United States. Your real estate lawyer can research these matters for you, or you can consult a tax attorney in your country.
Depending on the treaties between the countries, you could owe taxes in both countries, or the money might go to your country instead of the United States. There are many variables in the way this works, and it is better to understand ahead of time than get blindsided when taxes come due.
Estate Taxes for Your Family Members
If you pass away while owning foreign real estate, it could cause a headache for your heirs. State and federal governments sometimes charge estate taxes when an owner passes away. Your heirs might need to pay money to the government following your death. These details depend greatly on the value of the estate and other factors.
A real estate or tax attorney can explain your options, whether you are curious today or face this situation with a loved one’s investment property tomorrow. For some, this is not a concern right now. However, taking the right steps when making the purchase could prepare your children and grandchildren better to handle this when you pass away.
Why Work With a Real Estate Lawyer to Assist With Your Purchase?
Some people believe having a real estate agent on their side is enough to ensure their rights remain protected and they get answers to their questions. Working with a real estate attorney is the only way to get legal advice and guidance about your purchase. Your agent cannot give legal advice, tax advice, or other similar support.
You want a lawyer on your side, especially when considering a foreign purchase of real estate. There are several costly mistakes you could make if you do not understand the considerations and tax implications. Your lawyer can help you avoid these issues and work to reduce the financial burden of your investment today and in the future.
A real estate lawyer can also do research about your unique circumstances to ensure you have the information needed to make informed decisions. While most have a lot of knowledge and experience with transactions in their area, they will likely need to investigate the treaties with your country that could affect your taxes and other details.
Your Attorney Will Handle Closing the Sale
Many real estate attorneys handle the closing of the sale, too. They complete a title search to ensure there are no issues with the property’s ownership history and no one else can make a claim to the property. They issue title insurance to protect your investment, and they even schedule and host the signing of documents.
During this final meeting, you can expect:
- The attorney to prepare and present several documents to sign
- The attorney to answer your questions and address your concerns
- A clear explanation of each document
- A final review of your purchase and obligations
In the past, real estate closing generally occurred with all parties sitting around a table and signing the paperwork together. Technology and the pandemic made virtual closings much more common. In some cases, you might not need to come to the United States to finalize the sale of the property. Many jurisdictions allow virtual closings. There are also options, such as giving your lawyer the “power of attorney” to sign for you during this process.
Discuss Your Foreign Purchase of Real Estate With an Attorney to Learn More
The best way to ensure you understand the implications and considerations of a purchase of real estate from outside the United States is to speak with a real estate lawyer. Choose a lawyer in the area where you want to buy; they are more likely to be familiar with local codes and state laws that could affect your financial investment.
Generally, those interested in investing in property can contact an attorney nearby to discuss their options. Many real estate Law Firm in Vero Beach, FL represent the buyer in negotiating a fair price, reviewing contracts, managing title services, and handling the closing.