Buying US Property as a Foreign National
Non-resident individuals from foreign nations can obtain a mortgage for buying US property. This is commonly known as a foreign national mortgage loan. Foreign national mortgages are often sought after by foreign nationals who wish to own real estate, either as a second home, vacation home, or as investment property. Intercontinental Ultimate Solutions sources mortgage services to foreign nationals, including resident aliens, temporary residents, and other non-US citizens who may or may not be residents of the US.
The anatomy of a foreign national mortgage
Foreign national borrowers are typically required to make a higher down payment than local residents, with a minimum of 35% of the total purchase price of the property. This is referred to as a 65% loan to value “LTV” mortgage. Additionally, certain documents are required to be provided by the borrower, such as a letter from an accountant or auditing firm verifying income figures for the last two years for self-employed borrowers, a letter from the employer for salaried employees, and a letter of reference from a banking or financial institution showing at least 24 months history and relationship status. Borrowers must also have enough funds to maintain payments in the U.S. and their home country, and must set up an Auto Payment Debit Account with a US banking institution for monthly mortgage payments.
The tax considerations
Intercontinental Ultimate Solutions is a mortgage expert and not a tax law firm, law firm of any kind or a tax advisor. All of the following information is provided as a general overview of the topic and should not be misconstrued as tax advice. Please contact a US-based CPA or other tax expert for tailored advice.
As a foreign national owning a real estate property in the United States, it is important to understand the tax implications of such an investment. Taxes on US real estate properties can be divided into three main categories: property tax, capital gains tax, and income tax. In this article, we will cover the specifics of each tax and how foreign nationals can fulfill their tax obligations.
Property Tax
Property tax is a tax levied on the value of real estate property. This tax is levied by the local government, and the rate varies depending on the location of the property. As a foreign national, you are required to pay property tax on your US real estate investment. The tax is calculated based on the assessed value of the property, which is determined by the local tax assessor’s office. The assessed value is typically lower than the market value of the property. The property tax is due annually, and failure to pay can result in penalties and interest charges.
Capital Gains Tax
Capital gains tax is a tax on the profit realized from the sale of a capital asset, such as real estate property. As a foreign national, you are subject to capital gains tax on the sale of your US real estate property. The tax rate is determined by the length of time you owned the property. If you owned the property for less than a year, the capital gains tax rate is the same as your regular income tax rate. If you owned the property for more than a year, the capital gains tax rate is generally lower than your regular income tax rate.
Income Tax
As a foreign national, you may be subject to US income tax on the income generated from your US real estate property. The income tax is based on the net income earned from the property, which is the gross income minus expenses. The gross income includes rental income, as well as any other income generated from the property. The expenses include property management fees, maintenance costs, and property taxes. The net income is subject to US income tax, and the tax rate depends on your tax bracket.
Fulfilling Tax Obligations
Foreign nationals can fulfill their tax obligations by hiring a qualified tax professional to prepare their tax returns. The tax professional can ensure that all tax forms are completed accurately and filed on time. They can also advise on tax deductions and credits that may be available to foreign nationals. Additionally, foreign nationals may be required to obtain an Individual Taxpayer Identification Number (ITIN) from the Internal Revenue Service (IRS) to file their tax returns.
“Foreign national borrowers are typically required to make a higher down payment than local residents, with a minimum of 35% of the total purchase price of the property.”
It is important to understand these taxes and fulfill your tax obligations to avoid penalties and interest charges. Working with a qualified tax professional can help ensure that your taxes are filed accurately and on time, while also maximizing available deductions and credits. US estate planning attorneys licensed in the state where you own a property can also help set up a trust, which may help shelter you from some tax liability.
The benefits of holding a property in a trust
One solution to help navigate the tax and liability complexities of international real estate holding is to hold your US-based real estate in a trust. There can be distinct advantages to “holding your real estate in trust” including asset protection, estate planning and tax planning. Trusts also can also help you to maintain greater privacy and make it easier to manage your property from abroad.
Asset Protection
One of the primary benefits of holding real estate in a trust is asset protection. A trust can provide a layer of protection from potential lawsuits, creditors, and other legal claims. By placing the property in a trust, the trust becomes the legal owner of the property, rather than the individual. This can help protect the property from personal liabilities or legal disputes that the individual may face.
Estate Planning
Another benefit of holding real estate in a trust is estate planning. By placing the property in a trust, the trust becomes the legal owner of the property, rather than the individual. This can make the transfer of property upon the owner’s death much smoother and can help avoid potential legal disputes between heirs. Additionally, holding real estate in a trust can help reduce estate taxes and ensure that the property is distributed according to the owner’s wishes.
Tax Planning
Holding real estate in a trust can also provide tax planning benefits for non-US residents. One benefit is that the trust can help reduce the potential tax liability of the property. For example, if the property is generating rental income, the trust can help minimize the taxes owed on that income. Additionally, if the property is sold, the trust can help minimize the capital gains taxes owed on the sale.
Privacy
Holding real estate in a trust can also provide privacy benefits for non-US residents. By placing the property in a trust, the trust becomes the legal owner of the property, rather than the individual. This can help keep the owner’s personal information private and can make it more difficult for others to identify the owner of the property.
Ease of Management
Finally, holding real estate in a trust can make managing the property much easier for non-US residents. The trust can appoint a trustee to manage the property, handle any legal disputes or liabilities, and oversee the property’s day-to-day operations. This can help alleviate the burden of managing the property from the owner, who may not be physically located in the United States.
There are many different ways a trust can be formed in the US. Speak to an US-based estate planning attorney about the type of trust appropriate to your specific circumstances to ensure that your goals are met.
Your first step: Securing a US-based mortgage
Intercontinental Ultimate Solutions understands the US market and can match mortgage loans in multiple states to fit your needs. It is essential that you work with a qualified mortgage professional, who is able to assess your financial needs and provide solutions to you.
We are licensed to provide mortgage brokerage in the states of Florida, Arizona, California, Colorado, Connecticut, California, Maryland, North Carolina, South Carolina, Texas, Virginia and New Jersey.
If you are interested in investing in the US real estate market and are looking for a place to start, be sure to contact Intercontinental Ultimate Solutions today via our contact form or by calling (561) 717-6826.
