The real estate market in general!
Investment in the U.S. real estate market has been popular among foreign investors for decades. In 2010, a significant increase was noted in the demand of such investors, mainly due to the depreciation of real estate in different states, due to the “housing bubble” that occurred between 2006 and 2008.
The United States has always been a hub for foreign investment, but more recently, there has been a surge in investors from emerging countries due to increased disposal income for investment and because of the relative stability of the United States economy which results in more predictable return on investments.
The real estate market has many advantages in the United States as illustrated by the consistent rate of returns seen over the long term. Investors earn not only profit through the rising value of their property, but they also obtain a competitive return on their investment through rental income. In addition, there are a significant number of people buying houses or apartments for residential purposes as vacation home in the United States, for security and great personal satisfaction reasons.
The period of widespread decline in property values caused by the 2008 mortgage crisis, is now behind us. Prices have consistently rebounded, demonstrating a significant recovery in real estate values.
Therefore, taking into account the recovery of the real estate market mentioned above and the supply of properties, it is a relevant option to invest beyond the borders of one’s own country, but to do it so efficiently requires care. Although the process for purchasing real estate in the United States is among the most direct and less bureaucratic in the world, the complexity of taxes and tax reporting require extensive consideration before making a purchase.
This guide was written using instructional and practical language and its purpose is to assist investors, whether individuals or companies, who are interested in exploring the United States real estate market. It should be stressed that the purpose of this material is to enlighten readers in general, and shows that each real estate investment should be evaluated according to the investor’s particular environment. It is also worth noting that the support of a specialist is essential so that no major mishaps occur in the process of acquiring or investing in U.S. real estate.
For the purposes of this material, investors are treated as non-U.S. tax residents. It is important to remember that the definition of a U.S. tax resident does not depend on place of residence and is not necessarily related to immigration status, which means that a foreign national
may be considered a U.S. tax resident if he or she meets the following criteria:
Planning is critical for buying a property and this should be assessed according to the ultimate goal of the investor. The purchase of a property, which will be strictly used as a residence, requires a different kind of planning than a scenario in which the investor buys several properties that will be resold in the near future or used to generate passive income.
Among the planning stages, the tax impact study is extremely important. Below there is a list of some of the considerations to be analyzed:
One of the most important planning decisions is choosing the best structure for carrying out the purchase of the real estate. For example, foreign investors will have to decide whether to make the real estate investment in the U.S. as an individual owner, as a member of a limited liability company (LLC), or as a shareholder of a domestic or foreign company.
One of the options foreign investors can consider when interested in acquiring real estate for personal use only is direct acquisition, which is a less complex structure. Alternatively, foreign investors can acquire real estate through an LLC composed of only one member. Subject to applicable local law, the typical LLC provides limited liability protection corresponding to the capital contribution in the entity and also maintains direct ownership for tax purposes.
When the property is sold, the tax structure is simple.
There is only one level of levied taxes, and gains on
the sale of property may be qualified as capital gains,
which can be considered short and long-term, as per
the definition ahead:
Investments made by corporations, as foreign owners, in real estate assets in the U.S., provide investors with liability protection, which means that any liabilities related to the acquired property is limited to the capital contributed in the company. The company must also file its own tax return, making it unnecessary for the individual to report income in the United States – except in the case of dividend distribution. However, in the mandatory tax returns, the corporation must disclose the name and full details of the person who owns 50% or more of the company’s shares.
This structure has a disadvantage: the investment undergoes double taxation, using two levels of tax on earned income: the first level is income tax on the net income of the corporation, which can reach 35% (federal tax), plus state tax; the second is the tax on the distribution of these profits to the owner through dividends which, in the case of non-US tax resident partners, is 30%. At the time of sale of the property, a short or long-term capital gains tax is applied, according to the period in which the investment was made by the entity. It is worth noting that in the case of Brazilians, federal taxes paid in the U.S. can be compensated with taxes to be paid in Brazil, since Brazil has no treaty signed with the U.S. for this purpose6.
It is also important to mention that the domestic corporation structure does not eliminate the foreign investor’s exposure to estate taxes in case of death, and the same also applies to shares in American companies.
In a partnership structure, the legal entity is disregarded for tax purposes (systematically also called pass-through). Under this structure, the legal entity does not pay income tax; only the partners, as individuals, are responsible to
pay income tax.
The partners are taxed directly on the proportional value of the amount invested, regardless of whether a profit has been distributed. Each of the foreign partners must file an individual income tax return. The percentage is the same as applied to U.S. citizens.
The purchase of real estate in the U.S. through a foreign company is another alternative. A foreign company is mainly used to minimize the exposure of the individual investor to U.S. income tax and American estate taxes. Foreign companies must comply with the tax requirements set forth by the Internal Revenue Service if engaging in a business in the U.S. or at the time of acquiring a real estate asset via liquidation of the investment.
However, any sale (or inheritance) of the equity interest in a foreign company occurs in its local jurisdiction, with only local and not American taxes charged. On the other hand, rents earned from a property in the U.S., or dividends distributed by an American subsidiary of a foreign company, continue to be taxed in the United States.
A real estate investment trust is an instrument that enables different investors to combine capital for purchases, management and, in most cases, income generation operations, such as rental income and interest on mortgages. In general, the operating revenue of REIT is subject to a withholding tax of
30% when distributed to shareholders as dividends, unless this retention is reduced or eliminated through tax treaties between the country of residence of the shareholder and the United States. The capital gains derived from the performance of REIT investments are generally subject to FIRPTA, which can be as high as 35% for foreign investors. Exemption from FIRPTA is granted to REITs that are traded on American stock exchanges or considered “with domestic control”, i.e., when more than 50% of the entity’s shares have been
held by U.S. citizens for at least five years.
It is vital that investors have a clear idea of what they want to achieve. Each person has different needs or interests, which determine the type of business that will be sought after.
Some people seek to acquire a second or third home, typically a “vacation home”, to meet the needs of families who want to be near a beach, marina or amusement park. For others, it is purely for investment purposes. In the latter case, there are two categories of investors:
At this stage, it is recommended to arrange a meeting between the parties – the buyer and the real estate agency – so that they understand each other and to ensure that the buying and selling process is absolutely clear to the buyer.
Every company and person accredited to conduct real estate activities in the United States enjoys exclusive access to a listing of all available residences. Information on purchase, sale and rental options are stored in a database called MLS (Multiple Listing Service).
The MLS is controlled by organizations linked to state governments and the federal government – DRE (Department of Real Estate) and DPBR (Department of Business and Professional Regulation).
Opportunities for commercial properties, however, are not widely publicized, and require more thorough and extensive research.
By knowing the needs, investment criteria and client expectations, the accredited real estate agent can access the MLS database and select the options that best fit the customer’s profile.
The selected properties can be presented to the client by email, or during a second meeting, so that the real estate agent can answer any questions about the property.
After selecting the property, the negotiation process for
the purchase and sale of the property begins.
In the United States, all purchases are done through a real estate agent accredited to carry out this kind of operation. The agent, aware of the client’s needs and goals, will draw up a report called a Cost Market Analysis, which presents a comparison between the sales price of the unit versus the values of similar units sold recently.
It is the responsibility of the real estate consultant to explain the Purchase and Sale Agreement and addendum to the buyer in detail.
It is worth remembering, again, that this contract and addendum are standardized, precisely to protect both interested parties.
The contract itself is used as a means to make the price offer, among other specifications, such as: payment method, closing date, inspection deadline, title company name, etc.
It is important to highlight that some specific factors can motivate the breach of contract between the parties. Failure to comply with the following events, on the stipulated dates, will be grounds for breach of contract:
For more details, it is recommended to consult a lawyer specializing in real estate transactions.
First of all, it is recommended that those interested in buying a property in the United States open a bank account in the country. Currently, the vast majority of banks require, in order to open an account, the presentation of a copy of the visa, passport and proof of residence in the country of origin.
All remittances originating from Brazil to the United States are made through the Central Bank of Brazil. The operation heading will be transfer of equity and/or availability of capital abroad.
In the case of Brazilian buyers, the only tax to be paid in transfers of this type is the IOF (Imposto sobre Operações Financeiras), and there will be no incidence of other taxes, as the amount remitted will have already been duly taxed in Brazil.
The title company, or the contracted law firm, will arrange for the closing of the deal on the date stipulated in the Purchase and Sale Agreement. If there is no funding involved, there is no obligation to sign in the United States, that is, it can be done remotely (eg, American consulate).
Closing costs vary according to each county and transaction, however, they basically involve some fixed costs, insurance policies and any guarantees that banks or condominiums may require.
The document used to certify the closing of a real estate transaction between the buyer and the seller is the HUD Form (HUD form).
The deed to the property is public and everyone has access to it through the portals and website of each county.
Foreigners do not need a specific visa to buy real estate, or even to obtain bank loans in the United States. A tourist visa (B1/B2), or just a work visa would be enough.
Every property generates some fixed expenses. Next, there is a mention of some expenses related to real estate, which can even be paid automatically by debiting the account.
However, it is worth mentioning that there are companies specialized in the management of acquired properties, which can control the payment of these expenses.
It is important to highlight especially for investors who want a return on rent that, when it comes to residential properties, unlike in Brazil, in the United States it is not common for the tenant to bear the costs of condominium and property taxes, therefore, the analysis of the costs of the owner, as well as the rent, must consider such expenses.
In the case of commercial real estate, there are five categories of contract that can provide for such issues, they are:
This tax is calculated on the assessed value of the property (assessed value). In this case, it is an ad-valorem that varies between 0.8% to 2%, depending on the location (city and zip code in the United States).
For calculation purposes, it is recommended to assume the conservative scenario, ie 2%. The amount can be paid between the months of November to March of the following year. The interesting thing is that the earlier the payment is made, the greater the discount on the amount to be paid.
It is mandatory to declare ownership of property abroad, if the property in question is generating some type of income. It is necessary to observe the need to declare assets and rights abroad in the local IR declaration.
In Brazil, for example, Brazilian citizens who have assets and rights abroad must report the acquisition value in the IR declaration. The acquisition value of the assets and rights, when expressed in United States dollars, must be converted into reais at the dollar exchange rate fixed for sale by the Central Bank of Brazil on the date of acquisition.
It is always recommended to consult an accountant for more information regarding this issue.
|Corporation & LLC||1120||Tax Return +Accounting||1 Property||US$ 980.00|
|Foreign Entity||F – 1120||Tax Return +Accounting||1 Property||US$ 1095.00|
|Foreign Entity||1120/F – 1120||Tax Return +Accounting||–||US$ 1095.00 – 1325.00|
|Foreign Entity||F – 1120||Tax Return + Accounting||5-more properties – + $150 more 6 properties||US$ 1,325.00 – 1,785.00|
|Individual Nonresidents||1040 NR||Tax Return + Accounting||1 Property||US$ 405.00 – 1,270.00|
|Individual Nonresidents||1040 NR||Tax Return + Accounting||2-4 Rental properties||US$ 520.00 – 865.00|
|Individual Nonresidents||1040 NR||Tax Return +Accounting||5-more properties||US$ 980.00 – 1,785.00|
|Individual Corporation||Forms 1099||Form 1099||1 to 5||US$ 230.00|
|Individual Corporation||Forms 1099||Form 1099||6 tp 10||US$ 345.00|
|Individual Corporation||Forms 1099||Form 1099||More than 10||US$ 635.00 – 1,150.00|
|Individual Corporation||Forms 1042||Form 1042||1 to 5||US$ 230.00|
|Individual Corporation||Forms 1042||Form 1042||6 to 10||US$ 345.00|
|Individual Corporation||Forms 1042||Form 1042||More than 10||US$ 635.00 – 1,210.00|
The content presented herein is provided for informational purposes only and is not intended to be a substitute for obtaining professional accounting, tax, legal or financial advice. The presentation of information is not intended to create a client-accountant or client-attorney relationship. We recommend that the individual accessing the material does not act on this information without the direct assistance of a professional. US tax information displayed here is not intended to be used to avoid sanctions under US law.