Buying Process
- Once property or land has been sourced, and a formal offer has been offered and accepted, a purchase agreement has to be signed and a mortgage loan from the bank has to be agreed.
- While the loan is being sorted out an investor’s solicitor will undertake searches relating to the property, its title deed and the validity of the vendor solicitor will undertake searches relating to the property, its title deed and the validity of the vendor to offer the real estate for sale.
- A property buyer should have a home inspection survey carried out to check for structural soundness, termites and radon. Furthermore they will be required to arrange a homeowner’s insurance policy before the sale can be closed.
- With the completion of all these steps the vendor and purchaser or their representatives will attend the title company to close the sale. The property investor will be required to present a certified cheque for the balance of the sale price, proof of insurance and proof of payment for insurance. In terms of the taxes and fees an investor will be required to pay, again they differ greatly from the state to state and it is imperative a potential purchaser discusses the property taxed, lawyer and agency fees that they will have to find before they commit to a property purchase in America.
Taxation Issues
- Real estate transactions are entirely governed by state law. Unlike many other foreign countries, the United States does not impose significant restrictions on the ownership of real estate by foreigners. One main difference however is in the manner in which capital gains tax is collected. U.S. citizens and residents ordinarily report capital gains in their tax returns. Non-resident aliens, however, pay a percentage of the sale proceeds to the U.S. Internal Revenue Service and then subsequently file accounts relating to the property in order to claim any refund that may be due.
- Capital Gains Tax – In the United States individuals and corporations pay income tax on the net total of all their capital gains. The tax rate for ‘long term capital gains’ i.e. assets that had been held for more than one year prior to sale was reduced in 2003 to 15% and to 5% for individuals in the lower income tax brackets. Short-term capital gains are taxed at a higher rate, the ordinary tax rate. In 2013 the reduced long term tax rates will be governed by a ‘sunset’ clause and will revert back to the ratesin effect in 2003, which were 20%.
Exemptions
- Every two years, an individual can exclude up to $250,000 ($500,000 for married couples) of gains on the sale of their primary residence.
- If an individual or corporation realises both capital gains and capital loss in the same year, the losses cancel out the gains in the calculation of taxable gains.
Succession Laws and Inheritance Tax
- A non-resident alien person of the United States is potentially subject to U.S. estate tax if he dies whilst directly owning U.S. property including real estate, equities and bonds etc. The concern for foreigners is that whilst resident owners of U.S. property enjoy an exemption of between $1,000,000 and $3,500,000 (2009) non-resident alien persons can only benefit from $60,000.
- The current rates of Federal estate tax range from between 18% and 55%. Therefore secondary homes owned by non-resident aliens can often be subject to estate tax.
- Relief between spouses is only granted if the surviving spouse is a United States citizen. For example, where a U.S. property is owned directly by a married couple who are non U.S. citizens and are ordinarily resident in a European Country and where one of the spouses dies, there would be a liability to federal estate tax based on the property’s market value. In the case of a property worth $500,000 the liability would be approximately $150,000.
- Many foreigners of the United States are not familiar with the various laws relating to estate taxes and should be aware that if ownership is structured properly through a non U.S. corporation, trust of foundation, the liability to U.S. estate taxes can be legally avoided.
Investment Potential
As with any real estate market, the American residential real estate market offers an investor two obvious ways to profit
- rental returns
- capital growth
In many of America’s major towns and cities there is great demand for rental accommodation from low grade to ‘A’ grade and because the market is so well established it is possible to track realistically achievable rental incomes per property type, per area. With this data to hand an investor seeking to maximise his rental yield can look for homes in need of renovation, homes at auction and homes being re-sold upon foreclosure where bargains can be bagged and yields can be hiked. Real rental growth and continued domestic consumer demand brought over a billion US dollars from Australia alone into the American retail real estate market last year alone. The luxury end, New York and up-market ski resorts in Colorado for example, attract impressive rental income.
An alternative to letting property, an investor can purchase, renovate, resell and make capital growth from straight property development but it is essential an investor understands what constitutes a true bargain, for example bad inspection reports can cloud this. It may well be advisable to actually inspect the property yourself. As the American property market is so well established, developed and documented it is possible for a potential investor to examine a property, calculate renovation costs and then roughly work out the profit margins realistically achievable and thus determine whether or not it would constitute a good investment.
An international investor looking to profit from US real estate has options as diverse as buying wholesale in gated retirement communities and letting units or purchasing brand new off plan properties in popular hotspots such as Las Vegas (Nevada), California or Florida and flipping upon completion to release equity growth.
The real estate market in the USA is cyclical, it ebbs and flows depending on the strength of the American economy, the supply and demand ratio, market value, market rental rates and the time lag between increased demand becoming apparent and effective supply becoming available. As previously stated the maturity of the American real estate market means that much evidence and data about the market is published daily and therefore readily available to the investor. This affords an investor seeking potential in a given American real estate sector the chance to find areas where potential exists or may present itself in the future.
The main advantage of the American property market over any emerging property market worldwide is that it is well established, well documented, consistently in demand and very carefully regulated, governed and controlled which removes many elements of risk. This reduction in risk can also mean that the greatest potential for profit is removed however therefore the American real estate market may not be suitable for all investors depending on what it is they are hoping to achieve from their property investment
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