Many questions remain about foreign investment in US real estate. Will foreign spenders be more cautious, or will they be desperate for any safe investment outside of their native economies?
Berdon LLP tax partner Maury Golbert (who recently moderated a panel at Bisnow's 7th Annual Multifamily Rundown) thinks we have nothing to fear, since US real estate continues to be very attractive to offshore owners. Not only is the US a safe haven with its stable currency, government and economics, but foreign investors see the US offering top-tier university educations for their children as well as top-tier medical treatment.
But, he warns, there are income tax and estate tax considerations that investors need to know. In a video Maury and Berdon made last year, Tax Traps Can Blindside Overseas Owners of U.S. Property, Maury says "most non-residents are shocked to find out that there can be a 40% estate tax levied on the valuation of their property should anything happen to them."
But have these considerations changed in the year since the video, with changes to the Foreign Investment in Real Property Tax Act (FIRPTA), China's economic woes and slumping oil prices? We sat down with Maury to see how foreign investment has evolved, and what foreign investors need to know in 2016.
To learn more about our Bisnow partner, click here.
The Major Markets Will Continue To Dominate
Maury believes that the US's major metropolitan areas-New York, Boston, Miami and LA-will continue to see a major influx in foreign investment in the residential sector because foreign investors continue to see these markets as strong, stable and a relatively good value. Residential properties in particular will continue to see high interest, since this asset class has countless high-net-worth individuals wanting to invest for economic and lifestyle reasons.
Maury says there are several ways that non-residents can mitigate estate taxes, but each comes with pros and cons. One option is outright ownership, which Maury doesn't recommend. Not only is it generally frowned upon due to liability risks, but also most non-residents are horrified to find that their property can be subject to the 40%-plus estate tax.
Using a foreign corporation has always been popular as they can help offshore owners avoid filing a US tax return, but these also come with income tax complications that could make selling the property more difficult in the future.
Trusts have also gained popularity, since they come with the benefits of avoiding estate tax and a favorable income tax based on a capital gains perspective. But, Maury warns, these trusts can be difficult to manage.
Pay Attention To The Calendar
One of the biggest blind spots for foreign investors is the residency issue. Unless under a student visa or other exception, a non-resident who spends more than 183 days in the US will be considered a resident for US tax purposes and will be subject to tax on their worldwide income. It's particularly nerve-wracking since the day count works on a three-year look back.
"They factor in 100% of the days of the current year, a third of the days of the previous year, and a sixth of the days in the second preceding year," Maury explains. "If you work through that formula, spending an average of 122 days a year over a three-year period will have you go over the limit by the third year. 122 days sounds like a lot of time, but it's only four months."
The Importance of Infrastructure
Maury says that all of these concerns stem from the fundamental infrastructure needed to deal with properties and investments from afar. Not only do foreign investors need lawyers capable across a variety of disciplines, but they need trustworthy real estate and tax experts as well.
"It has to be people you trust because invariably you're not going to be here all the time when things happen," Maury notes.
Outsourcing these operational tasks may be the dividing line between success and failure when investing in residential property in the US, he says, as even a delay in mail can lead to missed bill payments and disconnected utilities.
In addition, having a domestic team can help ensure that any complicated tax filings can be done on time and accurately and make sure other investments are on the up-and-up, especially as the government tries to instill more frustrating regulations to ensure disclosure and transparency. In short, oversight on the ground in the US is critical.
Berdon LLP, New York Real Estate Accountants