Real estate investors who travel to Boston frequently for work—or who just love visiting the area—are eager to put down roots in the area. Because Boston is a popular city for international real estate investment in the United States, it can be a lucrative way to diversify your portfolio. In addition, around 75,000 international students enroll in Massachusetts institutions every year, with the majority of them studying at Northeastern, Boston University and other Boston-area colleges. These international parents often purchase real property for their son or daughter to live in while attending college in Boston. But where to start?
Getting Started on an International Real Estate Investment
One of the first hurdles for foreign investors looking for real estate in the United States is that they may know almost nothing about the city where they plan to purchase. Unless you’ve spent significant time in Boston, how are you supposed to know the difference between Brighton and Brookline? There’s only so much that Google Maps can tell you.
The first step in an international real estate investment is to find a real estate broker who understands the unique needs of international buyers. Irene Novia Loka of Matahari Real Estate is such a broker, working with clients from all over the world, but primarily from Southeast Asia.
Having grown up in Indonesia and lived in Boston for more than 20 years, Irene’s uniquely positioned to understand her international clients’ needs. In addition to setting up appointments, accompanying clients to open houses and communicating with sellers’ agents, she also acts as a tour guide to help her international buyers get to know Boston and its many neighborhoods. Building a personal relationship with her clients is essential, Irene says. She’s a friendly face who understands where they’re coming from and can explain everything they need to know about Boston real estate and investing in the United States. Since many of these investors end up loving Boston and buying additional investment properties, having an ongoing relationship with a broker can be useful.
Irene also works with international clients on their financing questions. Some of her clients purchase property with cash. In other cases, Irene uses her relationships with banks and mortgage companies that work with foreign clients to help them obtain loans. She says that foreign investors should expect to put down 40 or 50 percent as a down payment to qualify for a loan in the United States. Foreign investors also need to be aware that the bank approval process will take much longer as the banks will need to verify their assets overseas.
In addition to introducing her clients to lending sources, Irene also connects them with the legal and tax advisers they need before making a purchase. “Once I see the successful ‘meeting of the minds’ between seller and buyer, I tell them that now it’s time for them to hire legal and tax counsel. Buyers have a lot of questions, especially about taxes in the United States, which is oftentimes very different from what they are used to in their own countries.”
Tax Issues for International Investors
There are a few major tax issues that international investors need to think about before buying real estate in the United States. First, they need to be prepared to file income tax returns every year while they own the property. Maintaining a relationship with an American tax attorney makes this relatively simple; foreign investors may not pay attention to American tax filing deadlines, but their attorneys should remind them before it’s time to file every year.
Another tax issue involves something called Foreign Investment in Real Property Tax Act (FIRPTA) withholding. Per the IRS, FIRPTA “authorized the United States to tax foreign persons on dispositions of U.S. real property interests.” If you’re not considered a United States resident for income tax purposes, and sell a property you own in the United States, 15 percent of the seller’s gross sales price are withheld and remitted it to the IRS. The withholding is applied against the taxes the foregin investor may owe to the United States. FIRPTA is very complex, so it’s essential that non-United States resident buyers work with tax attorneys who understand this law well.
International buyers should also consider estate tax issues related to owning real estate in the United States. Non-residents aren’t entitled to the federal estate tax exemption that United States residents receive. If a foreign resident dies owning United States property in their name, the entire value of the property (minus an exemption amount of $60,000) will be taxed at the current federal estate tax rate of 40 percent. Massachusetts also imposes its own estate tax. International buyers can lose a great deal of their international real estate investment to United States estate taxes when they die without proper planning.
International investors need to work with tax attorneys before buying property in the United States because advanced planning can minimize their estate taxes when they pass away. There are strategies that attorneys can use to help a foreign property buyer structure a transaction to avoid FIRPTA and estate tax issues.
For example, the purchase can be done in such a way that the property is legally owned by a United States corporation rather than by the investor themselves. This kind of structure isn’t perfect. When the owner eventually sells their property, they’ll pay the current corporate tax rate on the sale, which may be a higher tax bill than they would pay in capital gains taxes if they owned the property in their own name. But using this strategy can help foreign buyers bypass FIRPTA withholding when they eventually sell or avoid the federal and Massachusetts estate taxes. Owning property in the United States in a corporation is not always the correct structure and foreign investors should speak with their tax attorney on the best ownership structure for their circumstances.
Final Advice for International Investors
Foreign buyers looking to make an international real estate investment in Boston must rely heavily on local advisors. Working with a knowledgeable, flexible and creative real estate broker like Irene helps these clients identify the property they want to buy and get the financing in place. Buyers also need to work with tax attorneys who understand FIRPTA and non-resident tax issues early on in the process. Strategizing around those tax issues should happen before the deal is done so the transaction is structured in a way that minimizes future taxes.
Sassoon Cymrot, LLC works with buyers to help them make international real estate investments in the United States in a tax-advantaged way. If you’re thinking about buying Massachusetts property as a non-resident, we’re here to help you navigate all the legal and tax issues that might arise. Contact us today!