Have you ever wanted to purchase a property in the US real estate market even though you live outside of the nation’s borders? If so, here’s what you need to know.
The first question is can you buy US real estate as a foreign investor?
The answer is yes. In fact, foreign investment in US real estate is a major source of investment for the country. The US government allows for foreign investors to purchase US-based properties even without being a citizen of the country. This applies to both individuals and corporations that are foreign to the US. Each type of entity is able to purchase both residential and commercial real estate properties.
Some considerations for foreign investors engaging in US real estate markets.
Lack of Fannie Mae or Freddie Mac: These two organizations typically buy loans from lenders in the US in order to guarantee them. However, both Fannie Mae and Freddie Mac typically refuse to do this for foreign investors. Thus, it is much tougher for foreign investors to obtain loans since US banks do not want to be liable for the mortgages in the case of a default. This is partly due to the fact that it can be much harder to track people overseas.
Mortgages cost more: In the case that you do secure a mortgage from a US bank or financial institution, you will likely be subject to higher interest rates. This is the result of the higher risk levels associated with foreign investors.
Larger down payment requirement: You will also likely be required to provide a much larger down payment compared to domestic investors. This rate rises to 30% in order to compensate for the greater risk of providing a loan to someone outside of the country.
Approval becomes more difficult: Since you are residing outside of the US, it is harder for organizations to confirm various facts. As such, it can help if you deal with a bank that also has locations in your home country.
Despite all of these obstacles, there are many other financing alternatives to fund foreign investment in US real estate. For example, you can reduce these headaches by paying cash for a US property. Of course, this requires that you seek out an appropriate source of cash financing in your home country before venturing across borders.
How is income generated from these properties taxed?
Well, there are two options when it comes to the taxation of any income associated with foreign-owned investment properties.
Effectively connected income (ECI): This means that you are claiming the property to be associated with a US business. Essentially, the property will be taxed at the rate applicable to US citizens. Also, you are able to deduct the usual expenses of operating a property, like any mortgage payments used to fund the purchase.
Investment property: This option basically identifies the property as an investment property which means it is taxed at a 30% flat rate. All rental proceeds are taxed at this amount. Also, you are unable to deduct expenses associated with operating the property. So if you have financed the purchase with a mortgage, you will be unable to deduct your mortgage payments. However, you should consult your local tax authorities as your home country may have entered into a tax treaty with the US, which could potentially reduce this 30% tax rate.
One final thing to keep in mind is regarding estate taxes. A foreign individual’s US investment portfolio is usually subject to a 35% tax rate at their time of death. Typically, an exclusion of $60,000 exists as compared to the $5 million exclusion for US citizens. However, there are ways to increase this exclusion limit so it’s closer to the rate of a US citizen. This requires that the proper steps be taken before the passing of the investor.
The bottom line is that today's market is filled with many opportunities for the savvy investor. Our Rich Dad Education trainers will introduce you to proven strategies that can help you launch your career as a successful real estate investor and develop a "Rich Dad Mindset."
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