Foreign Investment in U.S. Real Estate

Assisting a nonresident alien (foreign) client as an advisor on U.S. real estate transactions requires more than just understanding the surrounding tax regulations. The attorney and broker advising the client must understand not only what the clients’ intent is with the property, but also any false assumptions or incorrect information that the client may have previously obtained. The advisor must counsel the client about all available planning options and consequences which likely do not come into play with a domestic investor. The broker, as well, will play a key part in helping the client identify the property that will best suit their need. Therefore, having a team comprised of a high-end real estate broker and knowledgeable attorney is the key to success when foreigners invest in U.S. real estate.

Foreigners planning to purchase real estate in the United States, whether a condominium, a cooperative apartment, a single-family home, or a multi-family home, should understand several basic rules of planning and the tax consequences arising from U.S. real property ownership. Further, it is imperative that this planning occurs as early as possible, as any modifications required after the foreigner has already closed on title can be costly both in terms of fees and taxes.

It is important for the foreign investor to understand that no single structure or planning method is ideal for all investors. The advisor must take into account all city, state, and federal taxes, capital gains taxes, the United States estate tax, any applicable gift taxes, and quite often, the desire of many clients for their ownership to be anonymous or confidential. The broker must take into account the clients’ price range and investment horizon, whether the property will be rented or for personal use, and whether the client intends on investing in additional real estate in the long term. Based on the above factors, the large scope of structuring choices can slowly be narrowed to several that best suit the particular investor.

For foreigners, one of the most important (if not the most important) considerations needs to be the United States estate tax. When a foreigner owns U.S. real property in personal name and dies, the foreigner’s estate is required to pay nearly 48% of the date of death fair market value of the home to the IRS within nine months of the date of death. Any mortgages on the property (or other financing, for that matter) are disregarded completely and will likely need to be paid back, as well. Foreigners are only entitled to a $60,000.00 exclusion; therefore, they face quite a costly problem when owning property, especially in New York City where the purchase prices are quite high. If the advisor only structures the investment to avoid the U.S. estate tax without properly explaining the pros and cons of each proposed structure, however, the advisor will likely fail to meet the client’s actual needs.

If the investor wishes to rent the property, the advisor must also make sure to explain how each potential structure will have different and adverse tax consequences in terms of income taxes.

A client’s investment will likely only be as good as the advice that he obtains from the professionals around him, and therefore, selecting the appropriate real estate broker and attorney should be the first step any foreign investor takes when considering acquiring U.S. real estate.