Expat Real Estate
5 Tips for Expats Purchasing Real Estate in Different Countries
Owning real estate can be a great financial investment or, if you are buying a home for your family, an investment in your future. Not only does real estate typically appreciate in value over time, the income it produces can provide extra money for you and your family now and in retirement. Plus, real estate is not as correlated to stocks and bonds, which means it can add an extra layer of diversity to your portfolio. For expats, though, property ownership can be more complicated if you are buying outside your country of residence or move away from a country you own property in.
Countries that restrict property ownership
More and more countries are restricting or even banning foreigners from owning real estate, primarily as a reaction to skyrocketing home prices and decreased affordability by residents. A few dozen countries make it difficult or impossible for foreigners to buy property, so if you want to buy property as a foreigner in one of these countries, you may need to look elsewhere. Many major countries, including the US and most European countries, have no legal restrictions on foreign property ownership.
In the US, foreign buyers may be subject to FIRPTA (Foreign Investment in Real Property Tax Act) withholding of 15% tax on the purchase of property in the US. Although this tax may be withheld, it is not the final tax you owe. The tax is meant to discourage foreign investors from avoiding or underpaying taxes. The IRS outlines exceptions from FIRPTA withholding, including when the sales price is $300,000 or less (with caveats), the transferee receives a withholding certificate from the IRS, and more. You will need to submit form 8288 to report income from any US source and pay taxes on that income, and may also apply for an exclusion if your home country has a tax treaty with the US, to reduce or eliminate your withholding. If your home country has a tax treaty with the US, you may be able to file form W8-BEN to let the IRS know you will be taxed locally and avoid FIRPTA withholding.
Before you buy internationally, here are some questions to ask yourself to ensure you do it the right way.
1. Why are you buying?
Your use of the property can affect where you buy, what type of home you purchase, and even what types of loans you may qualify for. There may be a large difference between a home that is great for your family to live in and a home that is a great investment. Keep in mind that real estate can be time-consuming, if you manage the property yourself, or costly, if you hire a property manager to run the day-to-day operations. If you want real estate to play a more passive role in your portfolio, you may be interested in REITs, or real estate investment trusts. REITs are companies that either own, finance, or operate properties. You can invest in REITs in the same places you are already investing for retirement, including your 401(k) (if your plan offers any), IRA, taxable account, and more.
2. Do you know the local market?
Real estate markets can be hyperlocal and vastly different depending on the location you are buying in. One city may be extremely competitive with fewer homes on the market, most homes selling for over asking, and buyers waiving inspections and other contingencies. Another city a few hours away could have homes sitting on the market for months, consistent price drops, and more buyers with the upper hand in negotiations. If you aren’t intimately familiar with the market you are buying in, it may be worth working with a seasoned real estate professional. In competitive markets a good agent can give you an extra leg up compared to other buyers, and in less competitive markets they can get more concessions from sellers.
3. How will your real estate investment be taxed?
The taxes you pay on your property will depend on where you live and what country your property is located in. If you are renting the property out, any rental income is typically taxable (but may be offset by expenses to manage the property). When you sell the property, you may owe taxes on the gain if it has appreciated in value since you purchased it. You will want to check to see if tax treaties or double tax agreements exist between the country the property is located in and your country of residence to reduce or eliminate the potential for double taxation.
4. Do you know how you are going to pay for the home?
Paying for a home in cash as a foreigner is straightforward, but if you are planning to use a loan it may be more complicated. To be approved for a conventional home loan in the US, you must have proof that you are able to legally work in the country and if your work visa is expiring soon, you might need to show that it will be renewed by your employer. It’s not uncommon for banks to require a larger down payment from foreign borrowers due to the loans being viewed as more risky in some situations.
If you are buying a home in another country solely as an investment and not to live in, you may not need to show proof you can live and work in the country. After all, it’s possible to purchase and own an investment property in a different country without ever stepping foot in said country!
5. Is the market different in the country you are buying in?
If you are buying real estate in a different country, chances are the market is different from the country you are familiar with. In the US, it may be easier to find comparable sold and listed homes thanks to the Multiple Listing Service (MLS) but the market may be more volatile since it is less regulated than some other countries. Laws also vary from state-to-state in the US, so buying a home in Minnesota will be a very different experience from buying a home in California.
Property ownership is attractive no matter if you are looking to buy a home for your family or add another asset class to your portfolio. Purchasing real estate can be more complicated for expats, so it’s important to know the laws of the country you are purchasing in, tax consequences (of owning the property, rental income, and selling the property), how to pay for the property, and any other restrictions on foreign property owners. If you have any questions about expat property ownership, drop me a line to learn more about working with Aberdour Investments.