U.S. Real Estate Investments

Nonresident investors, U.S. real estate

U.S. real estate can be a great investment for nonresidents.  The market is extremely large, fairly liquid, and offers with many different opportunities: everything from thousands of hectares of land to warehouses to office towers to houses, large and small. There are almost no legal barriers to investment. Nonresidents and noncitizens can own U.S. real estate without restriction.

A well-considered purchase will yield good investment returns.  For many of our clients, a U.S. real estate investment is also a currency hedge:  it is a bet on the U.S. dollar as well as the normal expected investment returns.  For a few, a U.S. real estate investment hedges personal and political risks as well.

Tax and investment return

Taxes reduce investment returns.   An investment decision made without a financial and tax analysis is just a blind bet.  An expensive wish for luck.  And if there is anything we have seen over the last decade, it is that real estate is no longer a guaranteed winning bet.  Do not buy real estate without understanding and estimating your after-tax return on investment, and comparing it to your alternatives.

Inevitable taxes

Some taxes are inevitable.  Rental income will be taxed.  Capital gain will be taxed.  The best a nonresident can achieve is to be taxed just like a U.S. resident is taxed on a real estate investment.

Optional taxes

Some taxes are optional.  The estate tax–the tax on wealth at the time of death–is by far the most important of these optional taxes. For an institutional or corporate investor, the estate tax is irrelevant–corporations and pension funds never die.

But people die, and the estate tax can cause enormous (and avoidable) financial harm to their heirs.

The estate tax does not exist to pay for routine government services. It provides a miniscule amount of the U.S. government’s annual tax collections.

No, the estate tax is designed and intended to destroy family wealth. It exists as a matter of government policy because of a belief–by a sufficiently powerful group of voters–that families should not accumulate too much wealth.

For the nonresident individual considering a U.S. real estate investment, the choice is simple:

• Buy U.S. real estate correctly, and a nonresident investor is immune from the estate tax.
• Buy it wrong, and the investor’s heirs face an enormous tax when the investor dies:  35% of the value of the property at the time of death, for reasonably-sized investments.

Or the investor can be lucky. Buy, hold, and sell the property before you die, and the estate tax problem is irrelevant. You sold, paid the capital gains tax, and took the money home. You win. If you’re lucky.

Legal systems, business customs

The legal systems and customs that apply to real estate ownership in the United States vary wildly from one place to the next. Customs vary from place to place on whether the buyer or the seller pays for a particular expense in the sale.

In some places (like New York), law firms handle the closing of real estate transactions. In others (like California), real estate closings happen through escrow companies or title insurance companies. Even within states you will see variations. In San Francisco, a title insurance company will usually act as the closing agent transaction, while in Los Angeles a title insurance company and an escrow company would be involved.

For a nonresident investor, this can be bewildering. Even the existence of title insurance companies and escrow companies can be unfamiliar. Why are they there? What do they do? Why am I paying so much money to them?

Tax advisor, deal runner

Tax, financial analysis

Our particular specialty is international tax. We know how to handle the taxes imposed on nonresident investors. In many cases we work with our clients to help them refine their financial projections when analyzing and (attempting to predict) the after-tax return on investment for a property they are considering. We also do the financial projections internally–we have the financial, tax, and accounting skills in-house.

Tax planning and clean-up

The secret to tax success is buying the property correctly. Who is the owner, and what is the precise legal and tax configuration of that owner? How you buy the property–and hold it until sale or death–will define the tax treatment of your investment.

We have deep experience in setting things up right from the start. We use U.S. and non-U.S. trusts, corporations, partnerships, debt, and other methods to achieve the desired results.

We also clean up badly-structured real estate investments where it is possible. Where a nonresident has purchased U.S. real estate incorrectly, we reconfigure the holding structure to achieve better tax results. Before doing that, of course, we figure out whether the cost of re-engineering the investment will generate enough tax savings to make the whole project worthwhile.

Deal runner

But tax questions do not exist in a vacuum. They are tied to a transaction. A purchase. A sale.

We handle real estate transactions from start to finish, organizing the participants and ensuring that the deal closes on schedule. This is not easy, and sometimes takes an enormous amount of work.

Our clients’ deals close.