The New York Real Estate market has been very attractive to foreign investors as one of the superior returns in the investment market. According to various Real Estate Brokerages, there was a decrease in foreign buyers in New York over the last couple of years and especially during the lockdown. Speak with an experienced Manhattan real estate attorney before you make any decisions on buying or selling property.
The good news is, according to a Bloomberg News article titled, “Manhattan Luxury-Home Buyers Come Back, Lured by Deep Discounts,” “CONTRACTS to buy Manhattan luxury homes are faring well even in the pandemic, with more deals signed in the past three months than in the same period last year.”
Can Foreigners Buy Property in USA
The property market in the United States offers an inclusive environment for international buyers, regardless of their nationality or residency status, thereby allowing investors from around the world to explore diverse opportunities in residential or commercial real estate within the country.
Foreign buyers have the option to purchase single-family homes, or condo units, or invest in commercial properties. However, one potential hurdle they may encounter arises when attempting to buy into a housing cooperative.
In the case of a housing cooperative, often referred to as a co-op, the buyer does not directly acquire ownership of the property itself. Instead, they obtain a share in the cooperative that owns the condominium building.
While co-op properties may provide lower prices compared to other housing options, they are primarily intended for use as primary residences and are not suitable as investment properties.
If you are a non-resident seeking an investment property in the US, the easiest route may be to fund the purchase with cash. Obtaining a local mortgage can be challenging without a local credit history. Although it is not impossible for foreigners or non-residents to secure a local mortgage, they may encounter higher interest rates and be required to provide a substantial down payment to qualify for the loan.
Working with international buyers and in light of new regulations, we observed that even with investing billions of dollars in New York’s market, foreign investors still faced several challenges. Here are some of those challenges:
1. Language Barriers for Foreign Investors in the U.S.
It is a well-known fact that the U.S. is a country of immigrants. New York City is the most populous city in the United States with a population of 8,550,405 as of July 2015. NYC Department of City Planning states that “half of all New Yorkers speak a language other than English at home, and over 200 languages are spoken in New York City.”
However, foreign investors still face many challenges associated with language barriers. The WSJ suggests that “in 10 years, a small earpiece will whisper what is being said to you in your native language nearly simultaneously as a foreign language is being spoken.” While the new innovation work is still underway, one solution to this problem is to cooperate with law firms that not only speak but also provide you with valuable legal advice in your native language.
Foreign investors who do not speak any or speak poor English prefer to work with real estate professionals who speak their language, be it a Real Estate Broker, Mortgage Banker, or Real Estate Attorney. People with a similar background to you in terms of culture and/or language can truly understand the mentality of foreign investors and address their needs to achieve the best-desired results.
2. Disclosure of Identities in All-cash Purchases of Homes Priced at more than $300,000
According to the Geographic Targeting Orders (GTOs), U.S. title insurance companies are required “to identify the natural persons behind shell companies used in all-cash purchases of residential real estate. These renewed GTOs are identical to the May 2020 GTOs. The purchase amount threshold remains $300,000 for each covered metropolitan area including New York City. The information must be disclosed to the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN).
The terms of this Order are effective beginning November 6, 2020, and ending on May 4, 2021. GTOs continue to provide valuable data on the purchase of residential real estate by persons possibly involved in various illicit enterprises. Reissuing the GTOs will further assist in tracking illicit funds and other criminal or illicit activity, as well as inform FinCEN’s future regulatory efforts in this sector.”
Earlier attempts by FinCEN was capped at $3 million in 2016.
As noted in a 2016 The New York Times article “U.S Will Track Secret Buyers of Luxury Real Estate,” the government has required real estate companies to disclose names behind cash transactions, and it is likely to send shudders through the real estate industry, which has benefited enormously in recent years from a building boom increasingly dependent on wealthy, secretive buyers.”
However, there have been several gaps in the above-referenced regulations, such as disclosure would apply only to all cash checks and not the wires received by the Title Companies; or the above regulation was a court order addressed to specific Title Company underwrites, so it can be interpreted that other underwriters are not required to disclose buyers identities.
3. Banking Regulations and Challenges for Investors Borrowing to Purchase Real Estate
Most foreign investors buy all-cash newly developed properties, but, for example, with 3mln to invest, the same investors could invest in two different properties by putting 50% down and financing the rest.
The Community Reinvestment Act of 1977 (CRA) “applies to banking institutions with deposits insured by the Federal Deposit Insurance Corporation (FDIC), such as national banks, savings associations, and state-chartered commercial and savings banks. The CRA requires federal banking regulatory agencies to evaluate the extent to which regulated institutions are effectively meeting the credit needs within their designated assessment areas” (where institutions have local deposit-taking operations).
In spite of established banking regulations, challenges remain for potential investors planning to work with banking institutions in the U.S. In particular, new criteria in KYC banking regulations have led to a number of challenges from rising costs to the difficulty of implementation.
Another challenge for investors is the absence of their own credit story. Some lenders in New York are friendly to investors and will require only proof of personal financial track records. However, in this case, investors will pay back for this kind of “friendship” by providing a huge down payment and a hefty interest rate.
Working with foreign investors, we observed that HSBC runs the most competitive investor-friendly lending program. Some other lenders that we would recommend for foreign investors to check are: Citi Bank, Guardhill Financial, and private lenders depending on the particular case, location of the property, and the investor’s background, investor’s portfolio, and liquidity. However, when you are a foreign investor, it is always better to work with the Mortgage Banker that has experience dealing with investors with particular backgrounds as it may affect the process. Experienced Mortgage Bankers can guide you accordingly and make the entire borrowing process as smooth as possible.
4. Investing in Property Tax Liens in New York
While for the American owner, it is a norm to pay Real Property Taxes on a property owned, many other counties do not have Real Property Taxes, thus it is not uncommon to meet foreign investors in the USA who miss their property tax payments and faced with the Tax Lien Situation.
When a homeowner fails to pay taxes, the government agency can place a tax lien on the property for the unpaid amount. The property that has a lien attached cannot be sold or refinanced until the taxes are paid and the lien is removed. In tax lien states, when a lien is attached to the property, the taxing authority issues a tax lien certificate. These certificates can be sold to a third party at auctions. In tax deed states, when a third party purchases a tax deed, it is purchasing an actual property. Thus, when a tax deed has been sold to a third party, the prior owner cannot reclaim their property.
According to the document “State Guide To Tax Lien And Tax Deed Investing,” “New York is a mixed state. Some counties have tax lien sales and others have tax deed sales. Most of the state conducts deed sales. Nassau County sells liens, as do the five boroughs of NYC. The tax lien sales in NYC, however, are not open to investors. They are private sales where the liens are sold to city fund companies. Later on, these companies may have public sales.”
Once the lien is sold and a new owner threatens the investor with a summons to start foreclosure, it is an additional legal expense for the foreign owner. At that point, there isn’t much of a window for negotiations and to safeguard the property. The investor then has to pay off the lien amount along with any interest accumulated in full, cover the plaintiff’s attorney legal fees, and pay for their own legal fees related to the foreclosure and settlement procedure.
5. FIRPTA Withholding Rate Went Up from 10 to 15%
The IRS’ website states, “The disposition (sale or exchange, liquidation, redemption, gift, transfers, etc.) of a U.S. real property interest by a foreign person (the transferor) is subject to the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) income tax withholding.” Based on the FIRPTA law, “persons purchasing U.S. real property interests (transferees) from foreign persons, certain purchasers’ agents and settlement officers are required to withhold 15% (10% for dispositions before February 17, 2016) of the amount realized on the disposition (special rules for foreign corporations).” Therefore, “if the transferor is a foreign person and transferees fail to withhold, they may be held liable for the tax unless there are some exceptions.”
One exception is applicable when the property is acquired for use as a residence and the amount realized (sales price) is not more than $300,000. For this exception, the transferee must be an individual, and in this case, only notification is required.
It can become quite pricey for the real estate investor if he is not guided properly with purchasing when the same investor ends up paying 15% FIRPTA withholding on the purchase price when selling the property.
Whether you are a foreign person Seller, or a foreign person Purchaser, consult a knowledgeable International Real Estate Attorney to learn more about FIRPTA withholding.
6. Foreign persons who acquire properties in New York and then leave the USA need to be aware of Federal ESTATE USA Taxes on death.
According to the IRS, “deceased nonresidents who were not American citizens are subject to U.S. estate taxation with respect to their U.S.-situated assets.
U.S.-situated assets include American real estate, tangible personal property, and securities of U.S. companies. A non-resident’s stock holdings in American companies are subject to estate taxation even though the nonresident held the certificates abroad or registered the certificates in the name of a nominee”.
“Estate tax treaties between the U.S. and other countries often provide more favorable tax treatment to nonresidents by limiting the type of asset considered situated in the U.S. and subject to U.S. estate taxation.” Executors for nonresident estates should consult a knowledgeable USA Estate Attorney if such treaties where applicable.
Executors for nonresidents must file an estate tax return if the fair market value at death of the decedent’s U.S.-situated assets exceeds $60,000 and pay 40%.
In addition, the article “Federal Estate Tax Considerations for Foreign Investing in the United States,” adds that “the estate of a nonresident alien may deduct from the gross estate the value of property passing to the decedent’s surviving spouse if the spouse is a U.S. citizen or resident alien regardless of whether the spouse lives in the U.S. or abroad. However, if a spouse is also a non-resident alien, the unlimited spouse exemption does not apply.”
Knowledgeable Estate & Trust Attorneys can guide you through the process and educate you on possible Estate Planning Techniques that will help you minimize your Estate Taxes on death.
These are some of the most common challenges that we faced dealing with foreign investors in New York.
Here at Sishodia PLLC we are happy to receive your inquiries and questions on other challenges for foreign investors that we will be happy to address in our next post.
Our private clients at Sishodia PLLC include clients from many backgrounds including self-made wealth, inherited wealth, lottery winners, celebrities, international investors, and clients with digital wealth.
We have worked with international buyers and sellers from a multitude of countries – including Russia, Switzerland, Canada, the UAE, the UK, Turkey, Mexico, China, Korea, Italy, India, Singapore, Bulgaria, and France. We recognize that making decisions and planning for high-net can be personal and sensitive in nature, thus, our firm offers individualized solutions for your specific needs – whatever those needs may be.
If you are interested in learning more about our Private Client Practice,
Please contact our firm today for a free initial consultation. We look forward to assisting you in creating your Legacy.
Natalia Sishodia, Esq.
With assistance in Research by Natalia Lantonio
Challenges for Foreign Investors in New York | Description |
---|---|
Language Barriers for Foreign Investors in the U.S. | Foreign investors face challenges due to language barriers as many New Yorkers speak non-English languages. |
Disclosure of Identities in All-cash Purchases | Foreign investors making all-cash purchases above $300,000 must disclose their identities to the U.S. Treasury Department. |
Banking Regulations and Challenges for Investor Borrowing | Foreign investors face challenges in obtaining financing from U.S. banking institutions due to new KYC banking regulations. |
Investing in Property Tax Liens in New York | Foreign investors may face complications if they fail to pay property taxes, leading to tax liens on their properties. |
FIRPTA Withholding Rate Increase | Foreign investors are subject to FIRPTA withholding at 15% on the disposition of U.S. real property interests. |
Federal ESTATE USA Taxes on Death for Foreign Property Owners | Deceased non-resident foreign property owners may be subject to U.S. estate taxation on their U.S.-situated assets. |