Many Americans choose to purchase a property abroad, whether as a main home, vacation home, retirement home, for rental income, or for investment diversification. There are lots of factors to consider though from a financial planning perspective, from whether you should be buying overseas real estate at all, to foreign and US tax implications, minimizing currency losses, and whether you should seek mortgage finance.
In this article, we cover some of the key areas Americans need to focus on to avoid pitfalls and maximize opportunities when buying real estate abroad.
Rent or buy?
If you’re an American moving overseas, the first consideration should be whether to rent or buy your home abroad. Advantages of buying are often the security that comes with ownership and the potential for capital appreciation, however it is also a significant investment that can’t always be easily released again and comes with numerous other costs involved in buying and other considerations such as international estate planning and possible foreign capital gains, property or wealth taxes.
Foreign taxes
When buying property in another country, it’s essential to understand the local tax environment. Foreign taxes can significantly impact the overall cost and profitability of your real estate investment.
Capital gains tax
Many countries impose a capital gains tax on the profit from selling property. The rate and exemptions can vary widely. For instance, in Germany, if you sell a property owned for less than 10 years, you’ll be subject to a capital gains tax. Conversely, if you’ve held the property for over a decade, you may be exempt. Rules vary in every country, but most countries have lower exemptions than in the US, although some countries, such as the UK, don’t impose capital gains tax on the sale of your primary home and in other countries, like Spain for example, there is no tax assessed if you use the proceeds from a sale of your primary residence to buy another home in which you will live.
Note also that once you become a tax resident in a foreign country, selling US assets (including property) may trigger a foreign capital gains tax liability, so it’s often sensible to sell assets before you move abroad, for example if you need to sell a US property or other assets to purchase a new home overseas.
Wealth tax
Some countries, such as Spain, Norway, Switzerland, Argentina and Colombia, have wealth taxes that apply to individuals whose net worth exceeds a certain threshold. These taxes include real estate holdings. Italy meanwhile taxes the value of real estate outside Italy owned by Italian residents.
Property taxes
Annual property taxes are another consideration. Rates can vary based on the property’s value and location. For example, in Italy, property taxes are relatively low for primary residences but higher for secondary homes; in many countries they are imposed locally and vary by region, so it’s worth doing detailed research to understand property tax implications in the place you’re thinking of buying.
Inheritance tax
Different countries have varying inheritance tax laws. In Germany, for example, the inheritance tax rate ranges from 7% to 50%, depending on the degree of kinship and the size of the inheritance. Beneficiaries may receive a credit for any US estate tax paid.
International estate planning
If you have assets in both the US and another country it is advisable to consult an attorney who specializes in international estate planning to ensure that your assets are distributed according to your wishes and to minimize tax burdens on your heirs. It may, for example, be necessary to create two wills, one in each country. This can also be the case if you don’t have assets in both counties, but if you have assets in one but are a tax resident in another.
Some countries operate under the principle of universal succession, meaning that both assets and debts are transferred to spouses and children in a way the state dictates without the need for a will, executor or court ruling.
Also, the way an estate is administered can vary. For example, in the USA there is probate, and trusts that can avoid probate, but in France it is a notary that handles the process.
International currency transfer
Transferring currency to buy real estate abroad requires strategic planning to avoid unfavorable exchange rates and high transfer fees that can result in significant losses.
Exchange rates
Fluctuations in exchange rates can significantly impact the cost of your property. It’s sensible to monitor rates, and you might consider locking in a favorable rate using a forward contract through a foreign exchange broker such as Moneycorp.
Transfer fees
Banks and money transfer services charge fees for international transactions. Comparing different providers can results in a significant saving. When purchasing property, traditional banks aren’t normally a cost effective option for international money transfer compared to specialist currency brokers. After the purchase, if you need to transfer smaller amounts, to pay property taxes for example, services such as Wise are a good option.
Mortgage financing
Some American banks offer international mortgages, but it’s also possible to secure a mortgage from a foreign bank. However, this can be complicated by differing lending criteria and potential language barriers, as well as a lack of recognition of credit ratings earned in your home country. Consulting with a financial advisor familiar with international real estate can be invaluable.
US reporting requirements relating to owning foreign property
Buying and owning property overseas doesn’t trigger a US tax reporting obligation, unless the property is owned indirectly through a US or foreign-registered company or trust. However, selling foreign property may result in a capital gain or loss that must be reported on your US tax return.
Rental income
If you decide to rent out your foreign property, the rental income you earn is subject to US tax. However, you can normally offset foreign tax paid on the same income against your US tax liability by claiming the Foreign Tax Credit.
FATCA and FBAR
The Foreign Account Tax Compliance Act (FATCA) and the Foreign Bank Account Report (FBAR) require US citizens to report foreign financial assets exceeding certain thresholds. While for most people these regulations will relate primarily to financial accounts, funds used for property purchases that land in your foreign account must also be reported.
In conclusion, while buying real estate overseas often makes sense in terms of investment or lifestyle, it requires careful planning and awareness of the financial implications. Consulting with financial advisors and legal experts familiar with international real estate can ensure investing in foreign real estate makes sense from an investment perspective and within the context of your wider financial goals, as well as provide invaluable guidance and help ensure a smooth process.
If you have any questions about financial planning or investing as an American living abroad, get in touch.
This article is for informational purposes only; it is not intended to offer advice or guidance on legal, tax, or investment matters. Such advice can be given only with full understanding of a person’s specific situation.
