THE 4 TAX ADVANTAGES OF INTERNATIONAL REAL ESTATE

1. NO CAPITAL GAINS TAX ON FOREIGN PROPERTY USED AS A PRIMARY RESIDENCE

For US investors, the rules on capital gains taxes from personal residences are the same, no matter where the property is located.

If you’ve owned US real estate (and actually managed to make a profit when selling), you are likely familiar with the tax law that allows you to exempt the first $250,000 in capital gains tax if single and $500,000 if married.

The same rule applies to international real estate.

To qualify, you must live in the house as your primary residence for two of the five years prior to selling it.

It’s best to purchase property in a country that has a similar system of property taxation as the United States since US tax law cannot offset or eliminate capital gains taxes payable where the property is located.

2. THE 1031 EXCHANGE ON “LIKE-KIND” PROPERTY

Another popular tax benefit used by US real estate investors is the 1031 exchange for swapping one property for another “like-kind” property. The goal is capital gains tax deferral.

We frequently talk about the power of compound interest and how it applies to offshore investing. Doubling a penny every day for a month becomes $5,368,709.12, but deducting 30% capital gains tax from each day’s profits leaves you with a mere $48,00 and change.

The lesson is that if you can’t eliminate taxes on your investment returns, deferring them is a preferable middle ground. Quite simply, paying tax on every transaction along the way can cost you a fortune.

Put another way, taxes on your investments are probably the difference between a luxurious oceanfront retirement and barely scraping by.

That’s why the 1031 exchange program is so interesting; it allows you to defer capital gains tax by rolling your original principal and the return into a new property.

Just as US real estate can be used in a like-kind exchange, so can foreign real estate. The only rule to remember is that “like-kind” is defined as either domestic or foreign property; the two can not be mixed.

3. OWNING FOREIGN REAL ESTATE IN AN OFFSHORE IRA

If you already have a retirement account, moving it to a cooperative custodian overseas can be your gateway to investing in all sorts of products that your US custodian would never let you touch.

Among those options: foreign real estate.

Of course, you can’t benefit from your own IRA. That means that, just as in the United States, you can’t buy a beachfront condo in Nicaragua and move right in. Terms like “self-dealing” and “IRA” don’t go well together.

However, you can own foreign real estate in your government-approved Self-Directed IRA, and you can enjoy ongoing rental income as well as capital appreciation.

Real estate held in your IRA is treated the same way other investments in your IRA are treated; it is taxed when you take the money out.

While US real estate held in a foreign trust isn’t always the best idea (any judge can claim the authority to invalidate the benefits of your foreign ownership), owning foreign real estate in a US government retirement account can have a lot of benefits.

4. TAX-DEDUCTIBLE MORTGAGE INTEREST

If you plan to purchase a second home overseas for use while on vacation or as a future retirement home, you may be able to write off mortgage interest on up to $1.1 million in debt.

It’s best to consult a US tax advisor before you add your second home’s mortgage interest to your tax return, but the key here is that the rules are supposed to be the same whether your second home is in the Bahamas or Boston.

The difficulty of this may be actually getting a mortgage as many foreign banks will not want to deal with expats (Spain, Portugal, Cyprus and Turkey do offer mortgages to US nationals).

You may be able to get a foreign mortgage by putting down 30-50% on a property, or by obtaining developer financing if your property is a new build (although many new builds that are expat-friendly tend to be overpriced).

Additionally, things like depreciation and other home-ownership expenses may or may not be deductible.

CONCLUSION

Thus, international real estate can be an important component of your tax strategy. With proper planning, you can use these investments to potentially reduce your tax rate to the single digits.

Therefore, regardless of your country of citizenship, buying foreign real estate can help you legally reduce your tax burden