Dateline: Kuala Lumpur, Malaysia
While I personally no longer invest in US real estate, I know that a lot of foreigners like the idea of buying property to rent out in the United States.
They like the idea that the United States is a transparent market. The pricing is transparent, there’s plenty of rental agents to handle your property, and there’s a full suite of services.
But many folks from abroad who are looking to invest in the United States are unfamiliar with western markets and don’t really understand what’s involved.
Similarly, when folks from the West come to us for help to invest in up-and-coming markets overseas, they often have unrealistic expectations about the foreign markets we talk about.
That’s why we do a lot of teaching here on the website and YouTube channel about how to invest overseas, the benefits of owning international real estate, as well as the challenges of investing in real estate abroad.
But today, even though I consider the future of real estate investment to be outside of big developed markets like the United States, I’m going to turn the tables and speak to those of you who do want to invest in the US.
So, if you’re a foreigner looking to invest in US real estate, here are the four main factors to consider:
1. Plan for Litigation Risks
The first thing you should understand if you’re investing in the US is that it is the highest litigation risk in the world for property investors.
This isn’t really a Western thing, it’s a US thing. If you invest in the UK or Ireland, it’s not as much of an issue, but in the United States, people love to sue each other.
Folks from the US will often come into some of these emerging markets we talk about and see a little nail sticking out from the wall and start to panic like someone’s going come and take everything that they own if someone gets a scratch from this nail.
But that’s just not how it works in most countries.
It is, however, the way things work in the United States. If you’re not used to that, you want to be aware of the litigation risk. Make sure you get an attorney to structure things for you properly in the US.
You will want to have lots of insurance and you will need to take the next point into consideration and build an asset protection strategy.
2. Have an Asset Protection Strategy
Most people I have known over the years use an LLC to hold their properties. It’s a more tax-efficient structure for a lot of people depending on where you live and your personal tax situation in your own country.
A lot of people in the United States use LLCs (Limited Liability Companies, which is a transparent structure different than a corporation) to hold their properties. Some people put every individual property in its own LLC while others will put two to five properties in one LLC.
Whatever you do, you will need to put properties in an LLC in the state where you’re investing. If you’re investing in different states, that can complicate things.
But making sure your assets are protected – making sure someone does not slip and fall on a banana peel and sue you and take all the properties that you’ve invested in – is definitely a concern in US real estate.
3. File Your US Tax Return
Now the third thing you need to be aware of is that you need to file a tax return if you are going to be investing in the US.
There are different forms for non-resident investors and there may be different tax treatments, but you want to make sure that you’re not screwing with the IRS.
I know in some countries filing a tax return is optional or people don’t do it andno one really tracks you down. In the US, the IRS is a lot more dialed in. People in the US are afraid of the IRS in a way that people in a lot of other countries aren’t afraid of their tax authorities.
But you won’t have to worry about the IRS if you do everything properly and legally.
Find a good tax preparer who’s an expert in what they do. In my world, I would say never go or do anything offshore without having an international-focused US tax preparer. The consequences are too great. If I’m investing in real estate as a foreigner, I want someone whose focus is working with foreign investors.
When you invest in US real estate, do the same thing.
Find someone who is used to working with foreigners, not just US persons. Find a tax preparer who is familiar with foreign non-resident alien investors to ensure everything is done properly.
You may not have a ton of taxes to pay if you’re just earning small rents and you’re taking depreciation, but make sure that everything is in line because the penalties are pretty substantial.
And if you have an LLC, you will need to file an informational return called Form 5472 for any LLC that has transactions within a calendar year. The penalty for not filing it has recently increased to $25,000. This rule not only applies to real estate investors but also to anyone who’s using US structures.
4. Avoid the Estate Tax
Number four is estate tax and how to avoid US estate tax. Now, you would think that if you didn’t live in the United States and you died, the US would not take a bite out of your assets.
Perhaps where you live they have an estate tax or perhaps you’re following our strategies and you’ve moved to a country where there’s no estate tax, but even if you’re not a US taxpayer you can be subject to the estate tax at your death.
And none of us knows when we’ll die, so it’s important to get this right. If you’re a US taxpayer, you get a multi-million dollar estate tax exemption that you can use throughout your lifetime through the unified estate tax credit.
But if you’re not a US taxpayer, your exemption upon death is much much lower. We’re talking tens of thousands of dollars.
If you have one good rental property, you’re going to trigger that estate tax. Then, when you die, the US is going to ask for its tax.
Now, you would think “what’s my connection to the US? Why am I paying this tax?” Well, because you have a US asset – US real estate. If you’re a foreigner and own US property in your own name, that’s going to be a problem.
I see this issue come up all the time. People want to make investments in the US, they want to buy a home using my trifecta method. Maybe they want to spend three or four months in a relatively tax-friendly way living in New York or Los Angeles.
It’s possible for foreigners to spend a few months a year living in the US. You can own a home there, no problem. Or you can buy US stocks or things like that, but you want to be aware of this particular issue and structure your affairs appropriately.
If you plan to invest or spend time in the US, you will need to maintain your diversification mindset and structure your affairs in an international way to make sure that you are not going to trigger the estate tax.
Should You Be Investing in US Real Estate?
If you’re a foreign investor buying real estate in the United States, those are four things that you want to think about before you take the plunge.
In my personal experience as someone who left the United States, I think that you’ll find a lot of markets overseas that have a lot less bureaucracy, a lot fewer costs, a lot fewer taxes, and a lot less maintenance.
When I sold my two investment properties in the US – I sold the last one about a year ago – I got the detailed escrow breakdown. I paid cash for these properties when I bought them, but I still got this escrow breakdown with twelve or fifteen different little fees that had come out while I was selling the property.
I got a $100 fine because the grass was half an inch too tall. I had to have my family friend attorney go in and fight to get this $100 fine dismissed because we had cut the grass a couple of days later. It was ridiculous.
But while US real estate investments aren’t for me, they might be the thing for you. Or maybe they’re not. Consider all your options before deciding on US real estate. Look into other investment opportunities that can get you a better return.
You can read the book Nomad Capitalist and find all kinds of ideas for investing in places that are pro-business and want you to invest there.
Then, contact us. Our Nomad Capitalist team has professional employees and connections that can help you come up with a holistic plan to help you go offshore.