U.S. real estate can be a great investment for nonresidents. The market is extremely large, fairly liquid, and offers 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 – a bet on the U.S. dollar as well as the normal expected investment returns. For some, 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’s anything we have seen over the last decade, it’s that real estate is no longer a guaranteed win. Do not buy real estate without understanding and estimating your after-tax return on investment, and comparing it to your alternatives.
Some taxes are inevitable. Rental income will be taxed. Capital gains will be taxed. The best a nonresident can achieve is to be taxed just like a U.S. resident on a real estate investment.
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, because corporations and pension funds never die.
But people die, and the estate tax can cause enormous (and avoidable) financial harm to their heirs. For nonresident individuals 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’ll 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 variation can be bewildering. Even the nature of title insurance companies and escrow companies can be unfamiliar. What are they? What do they do? Why am I paying so much money to them?
Tax and financial analysis
Our 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 potential property. We also do the financial projections internally – we have the financial, tax, and accounting skills in-house.
Tax planning and cleanup
Buying the property correctly is the secret to tax success. Who is the owner, and what is that owner’s precise legal and tax configuration? How you buy the property – and hold it until sale or death – will define the tax treatment of your investment.
We know how to set things up correctly 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 possible. When 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.
Real estate 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. Once they do, we can manage properties, collect rent, protect privacy and oversee the details. We do it all – and even manage architects, permits and the trickier parts of construction.
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