Friday, June 08, 2007

Taxes and Buying Overseas

While jetting off to an international crash pad carries an air of glamour, owning property overseas is not worry-free. Just ask your accountant.
Tom Hamilton, the director of family wealth planning services for Grant Thorton, an accounting and advisory firm, says he is seeing more clients of all financial means snap up foreign properties. “The world is getting smaller,” he said of homebuyers looking overseas.
But along with buying an apartment in Paris or a villa in Tuscany come several financial factors to take into consideration.
Taxes at Home
Even if second-homeowners are spending four months in their Costa Rican beach house and three months at their pied-à-terre in Berlin, a United States citizen’s assets are taxed regardless of where they are held. That said, owners can still garner the tax benefits that apply to property ownership on American soil. “The same rules apply as if you had a vacation home in the U.S.,” said Brent Lipschultz, a principal in the Personal Wealth Advisory Practice at Eisner LLP, a New York-based accounting firm. “You would be able to deduct the mortgage interest and the property taxes.”
Taxes Abroad
Property taxes vary from country to country, and so do estate taxes. But rental income earned on a foreign property is taxed by both the foreign government and the United States. To offset this financial burden and avoid paying taxes twice, a homeowner may take advantage of the foreign tax credit: Taxes on rental income earned from a condo in Mexico City, for instance, are paid to the local government, but that payment may be subtracted as a credit on a homeowner’s domestic tax return.
Buying as an Individual or a Corporation
How the property is held also affects the amount of tax paid. Foreign real estate transactions are often conducted within a locally recognized corporate structure rather than an American one, as that is “what the local custom suggests,” Mr. Lipschultz said.
But this is not always advantageous from a tax perspective, he added, explaining that while the profits of Stateside corporations are taxed as capital gains, those of foreign corporations owned by Americans are taxed as personal income — which is subject to higher rates.
He noted that in the recent case of a property owner selling a house in the Bahamas, the house had been bought within a Bahamian corporate structure. The owner faced a 35 percent tax hit from the United States because the transaction was taxed at personal-income-tax rates rather than capital-gains rates.
If the property had been held in a limited-liability company or partnership based in the United States, Mr. Lipschultz explained, he could have lowered those taxes to 15 percent, the capital-gains tax rate, instead.
While setting up a limited-liability company or a foreign corporation may be one option when it comes to buying a property, there is one big downside, according to Mario Mendez, the managing director of the Worldwide Group and developer of Las Palomas in Sonora, Mexico. Financing in Mexico is becoming “more and more available” for foreign buyers, he said, but “U.S. lenders will not generally lend to a Mexican corporation, even if owned by American citizens, or to an LLC.”
The alternatives for non-cash buyers? Developer financing at Las Palomas offers a 50-year loan that carries a 12 percent interest rate. That is nearly four percentage points higher than the going rate from a mortgage lender in Mexico.
Of course, structuring the purchase and paying for the home are only the start of the financial puzzle. Accountants point out that clients buying overseas are often unfamiliar with the tax maze that awaits them. “The tax side is where we run into problems,” said Mr. Hamilton, who advises overseas home shoppers to consult tax professionals both at home and abroad.
“Find a local attorney in that country who knows the local laws and an accountant here in the U.S. who understands the international tax world and how those foreign taxes affect you here,” he said. “You really need a two-pronged approach.”

By AMY GUNDERSON, The New York Times

Thursday, June 07, 2007

Increase of Foreign Investment in the U.S.

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