Questions on Investing from Abroad as a Foreigner

[Tim Uittenbroek]

Just for my interest, a couple of questions with regard to investing in US real estate as a non-US citizen from abroad. Also, if there's any recommended ways of going about this, please let me know and why that is the preferred route. 

I would be interested in hearing from those that have gone down this road before. I have a couple of ideas in my head for some things I may like to do, but would like to flesh it out a bit further.

1. What are the tax implications? I'm assuming there is still a need to file a US tax return on both rental and capital gains income. 

2. Is there an optimized structure that will minimize taxation? Setting up an LLC in the US?

3. I understand that upon sale of a property there is a 10% withholding tax for foreign investors. Depending on the actual capital gains/losses experienced on the sale,  I assume this is refunded in the subsequent tax return? That could mean a significant amount of cash is tied up.

4. Is there any way of managing exchange rate risk?

5. How does one typically go about the management of the property (collecting rent, conducting maintenance, etc..)? I assume this is typically handled through a property manager. What % of rent do they typically ask? I assume it's around 10%. That could translate to as low 50 bucks per month in some instances - would a property manager really have an incentive to manage a property for that monthly fee? I realize most have a portfolio of properties they manage, but it still sounds like a lot of headache for 50 bucks.

6. Is there any chance of finding "undervalued" properties as a foreign investor (I imagine this would only be possible with a very good local partner) or would turnkey really be the only option?

7. What sorts of financing options are available within the US (if any) for foreign investors?

Thanks in advance!

[Bill Exeter]

Originally posted by @Tim Uittenbroek:

3. I understand that upon sale of a property there is a 10% withholding tax for foreign investors. Depending on the actual capital gains/losses experienced on the sale,  I assume this is refunded in the subsequent tax return? That could mean a significant amount of cash is tied up.

Hi Tim,

Yes, foreign investors are subject to the FIRPTA requirements.  The settlement/closing agent is required to withhold 10% of the gross sale price when a foreign investor sells U.S. real estate.  The foreign person would then file a U.S. Income Tax Return, pay any taxes due (if any), and then get a refund.

Foreign investors also qualify for tax-deferred exchange treatment if they decide to sell and reinvest in investment real estate via a tax-deferred exchange (Section 1031 of the Internal Revenue Code).  However, the foreign investor will still fall under the FIRPTA requirements, so advanced planning is important.  Withholding 10% of the gross sale price can significantly complicate the timing of your reinvestment through a 1031 Exchange since a big part of your net proceeds may be held back.

There is a solution for this problem.  The foreign investor must apply for a ITIN, which I would recommend doing as soon as you start investing so that there are no last minute rush filing requests.  Once the ITIN has been obtained, the foreign investor can then apply to the IRS for a Certificate of Exemption from Withholding by certifying that they are completing a 1031 Exchange.  The settlement/closing agent will not have to withhold the required 10% IF they have the certificate before closing, otherwise they will have to withhold the 10%.  If the certificate is not received in time, notify the settlement/closing agent that a certificate has been applied for and is pending.  They will still have to withhold the 10%, but rather than remitting it to the IRS they can hold the withheld funds until the certificate is received.  This entire process can take 60 to 90 days, in some cases longer, so it is critical that the process be started as soon as the contract is signed.