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investment objectives, and create solutions together.

Foreign Nationals are allowed to own real estate in the US. In fact, there are very few
differences between a foreign and US buyer when purchasing real estate.
It is important that the Foreign Buyer understands the Buying Process and has some basic
information about general US real estate practices that may vary greatly from a
buyer’s home country.

US Real Estate Practices

– In the US, real estate is very transparent. A new listing for sale is required
to be posted to the listing service within 24 hours so that active listings are available to all
agents. This is unlike in many other countries, where buyers have to go from agent to agent
to find a property. We have access to all the listings in New York and can assist you in the
sale of any one of them.

Issues for Foreign Buyers:

Foreign buyers are generally prohibited from buying Co-ops

Co-ops generally prohibit foreign ownership. Co-ops usually require a buyer’s source of
income to be from the US and assets to reside in the US (at least the bulk of the assets).
Co-ops require this because they are ultra-conservative corporations and, if for whatever
reason the corporation had to sue an owner, it would be very difficult to be successful in the
litigation. Even if the corporation obtained a judgment against a foreign owner, it would
likely be unenforceable if the owner’s assets were sitting in another country 4,000 miles
Accordingly, Foreign Buyers are restricted to buying Condos (Condominiums), Condops
(Co-ops with Condo rules), and Townhouses. Buyers, however, have more rights when
buying a Condo, Condop or Townhouse than when buying Co-ops, which are very restrictive
on the use of the property.

Financing is Readily Available for Foreign Buyers

During the financial crisis, Foreign National financing dried up. However, over the last
couple of years, banks have loosened their restrictions on Foreign National financing.

Depending upon how long you think the holding period will be, you might want to go with an
adjustable-rate mortgage that matches the holding period and has slightly lower rates.
While banks are offering loans to Foreign Buyers, they require a long-term relationship with
the customer beyond just the mortgage. That is why they require as one of their terms that
the buyer hold the $100,000 deposit with the bank.
While this is just one example of a Foreign National mortgage program, we have access to
an array of mortgage brokers that suits the needs of a Foreign Buyer. Some of our mortgage
broker contacts work with small banks that have very competitive terms and more
flexibility than the big banks. Let us know if you want further information on this subject.

Foreign Buyers do not have to be in the US to Close the Deal

At the closing of the transaction, when the property is transferred to the new owner, the
new owner does not need to be in the US. Rather, the new owner can provide his or her
representative with “Power of Attorney” and the representative will have the right to close
the deal on behalf of the new owner. This is quite common and convenient for the buyer who
does not want to come back to the US for the closing.

Foreign Buyers Should Consult with Their Home Country Tax Specialists

A Foreign Buyer’s overall tax liability may be different than that of a US resident depending
upon the buyer’s home country’s tax treaty with the US, if any. Therefore, it is best to
consult a local tax advisor that is familiar with the tax treaty. For instance, the capital
gains rate for US residents is 15% (if the property was owned for more than one year).
Foreign Nationals, however, could be required to pay a higher rate, depending upon their
home country’s tax treaty with the US. A local tax lawyer who is familiar with your home
country’s treaty would be the best resource for answers to these questions.

Foreigners can Defer Capital Gains Taxes by Buying Another Investment Property

The US government allows Foreign Sellers to use Section 1031 of the IRS Code to defer
capital gains taxes. The rules are quite complex and one must not stray from the rules,
otherwise the transaction won’t qualify for deferral.

Foreign Buyer Must “Elect” to Pay US Income Taxes on Net Rental Income

The US government requires that the Foreign National “elect“ to pay US income taxes on
any net income (rental revenues less expenses) derived from rental property. If this election
is not made in a timely fashion (e.g., US income tax returns not filed), a tax of 30% of the
gross rental income will be assessed. Under this scenario, the investor would not be able to
deduct any expenses such as depreciation, interest, property taxes, common charges, etc.
Even if the Foreign Investor is incurring tax losses in the beginning years of their
investment, and, therefore, doesn’t owe any taxes to the government, they still must file
their tax returns in a timely manner in order to make the election.

No Income Tax For the First 10 to 15 Years When Financing Real Estate Purchases

Foreign buyers who finance their purchases with a 40% to 50% down payment will likely not
pay income taxes on the net rental income for the first 10 to 15 years, since the US
government is very generous when it comes to those expenses that are allowed to be
deducted from rental income. Since mortgage interest, common charges, property taxes,
depreciation of the asset over 27.5 years, insurance, and amortization of closing costs are
all deductions against income, in the early years the property will generate negative taxable
income. In future years, when the apartment is generating taxable income, such income can
be offset by the prior year’s negative taxable income (a.k.a. tax loss carry forward). This
results in no income taxes for many years.

Foreign Investment in Real Estate Property Tax Act (FIRPTA)
When a non-resident sells US property, the Internal Revenue Service wants to be sure they
get paid capital gains taxes. Accordingly, the IRS withholds 10% of the gross purchase price
of the property. When a US tax return is submitted reporting the capital gains tax, if there is
any refund due, that money will be refunded to the filer.

Foreign Buyers Must Plan to Avoid the US Estate Tax

When a Foreign Buyer dies, his or her estate will be taxed by the US government at close to
46%. This is easily avoided if the Foreign Buyer does some upfront planning. The planning
involves setting up a Limited Liability Corporation (LLC) and a Foreign Corporation. The LLC
would own the property, the Foreign Corporation would own the LLC, and the buyer would
hold shares of stock in the Foreign Corporation. Under this scenario, since the property is
“owned” by the Foreign Corporation, the US government would receive nothing upon the
death of the Foreign Buyer. This is a great tax savings for Foreign Buyers and is not very
expensive to implement. This structure also allows for the easy transfer of the property
from one party to another by the selling of shares of the corporation rather than the sale of
the property, which might trigger a taxable event.

It is advisable for any owner of investment real estate (foreign or US) to create at least an
LLC to hold the property, since using this structure limits the owner’s liability to the value
of the LLC, which would strategically own only that particular property and, therefore, the
owner’s liability would be limited to the net value of the property. Taking this one step
further, using a Foreign Corporation to own the LLC would provide protection to the Foreign
Buyer against the estate tax.

If a Foreign Buyer does not want to maintain the LLC and the Foreign Corporation (perhaps
because the investment is small), an alternative approach would be to obtain life insurance
in the amount of equity in the property. For example, a 40-year-old man in good health would
pay $350 per year for 20-year term life insurance paying a death benefit of $500,000. While
the Foreign Buyer would not avoid the estate tax, his or her heirs would receive the same
amount in case of death.