A Piece of Paradise: Advising US Owners of Foreign Real Estate

Written by Matthew J. Leonard and Ruth A. Mattson

World travelers are always looking for keepsakes to stay connected to foreign lands. A prized memento such as a local handicraft or a cap from a favorite destination can bring joy with no government involvement beyond a sales tax. However, travelers sometimes want something more permanent, such as a home in their foreign paradise. In contrast to a trinket, a beach condo in Mexico or a farm in New Zealand remains in that country, governed by local law even when it is owned by a foreign person. The mix of laws that regulate how foreigners can own and use real property may surprise purchasers. To ensure that their purchase does not become a cautionary tale, purchasers should coordinate with US and foreign advisors before and after the transaction.

The legal issues surrounding foreign real estate ownership may vary significantly. In this article, we focus on US laws because they apply to every US purchaser. In addition, we mention some common trends and issues that may arise under the laws of other countries.

Advisors working with US purchasers of non-US real estate should guide clients in four spheres: 1) identifying local counsel where the real estate is located, 2) considering tax and reporting implications in the US and abroad, 3) deciding how to take title, and 4) considering how the property will pass upon death.

Local Law

Purchasers should keep in mind that real estate will always remain governed by local law, no matter who owns it. A key step in any transaction is to retain local counsel: Every jurisdiction is unique, and there may be unexpected issues and opportunities associated with the property. Here are some reasons clients should coordinate early with appropriate local counsel:

• The country may restrict or even prohibit foreign land ownership.
• Land may be governed by local or regional rules and national law. A restriction in one area of the country may not apply in another area.
• Local laws may determine the ways that real estate can be passed to heirs.
• A traditional US estate plan may be ineffective or tax-inefficient in the local country.
• Some forms of ownership that are common in the non-US country may generate significant tax or reporting burdens in the US. Similarly, some forms of ownership that are common in the US may generate significant tax or reporting burdens in the foreign country.
• Living in non-US real estate may have local immigration consequences.
• Working remotely from non-US real estate may create significant tax and immigration consequences.

Depending on the arrangement, a US purchaser may work with one local advisor or a team of attorneys in the foreign jurisdiction. Local transactional counsel can coordinate the real estate purchase. The transactional work may include forming a local entity or receiving permission from local government agencies for the purchase. Immigration counsel can address questions of visa status, property use, and working remotely in the foreign country. Estate planning counsel can plan for the smooth succession of the property. Tax counsel can plan for tax efficiency and may prepare any local tax filings. 

The members of the local counsel team may be located in different firms and different parts of the world. For example, a transactional attorney may be located near the property. Tax, estate planning, and immigration counsel may be located in the national capital, another country, or even the US. Purchasers may postpone the estate planning and immigration reviews, but local transactional and tax counsel will be essential.

It is important to find advisors who have previously worked with foreign purchasers. Even if they do not have US-specific expertise, advisors who frequently handle international matters will understand how to coordinate transactions across jurisdictions. They also are more likely to have a network of helpful resources with similar expertise. Last, as with any human interaction, it is important for the purchasers and local counsel to speak the same language, both figuratively and literally, so they can communicate effectively.

Tax and Reporting Implications

Every US purchaser should step back and consider tax implications early and often when purchasing property abroad. Foreign and US taxes can significantly impact the cost of owning foreign property, so the tax calculation should be part of the purchase price calculation.

US tax considerations include income tax, gift and estate taxes, and information reporting requirements. Taxes in the local jurisdiction may vary depending on how the purchaser intends to use the property. In addition to property and income taxes, foreign jurisdictions may have a wealth tax, inheritance tax, and unexpected information reporting obligations. If the foreign jurisdiction applies taxes to its residents, be sure to learn how that jurisdiction defines residence and how to avoid accidental resident status. Tax treaties and US foreign tax credits may provide some relief from double taxation. Some nations also offer a period of favorable tax treatment for new residents.

Retaining tax professionals licensed in both the US and the foreign jurisdiction is important. All of these tax professionals should be seasoned in international tax planning. Their knowledge and experience will help the purchaser avoid penalties by staying fully compliant with tax filings. Professional guidance may also save the purchaser money through deductions and tax credits.

In addition to foreign taxes, every US purchaser should consider the US income tax, estate and gift taxes, and information reporting associated with the purchase of foreign real estate.

US Income Tax Considerations

US persons, including citizens and residents, must report . . . 

Continue reading the full article by becoming a subscriber to the WealthCounsel Quarterly digital magazine for free! 

Already a WealthCounsel member? Click here to access the full article.