Which U.S. Real Estate Markets are Most Promising for Foreign Investors?

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Every year, a growing number of foreign investors enter the real estate market in the United States. The country’s economic stability, high financial returns, and favorable policies toward international investors make this market highly attractive. However, investing in a new country can be challenging and involves risks.

This blog aims to inform and educate about the main challenges and critical aspects that foreign investors face when entering the U.S. real estate market.

Can Foreigners Buy Real Estate in the U.S.?

Yes, foreigners can purchase property in the United States without the need for citizenship or a visa. Properties can be purchased directly under the investor’s name or through various structures such as trusts, corporations, or LLCs.

What is the Share of Foreign Investment in the U.S. Real Estate Market?

Foreign investors represent a significant portion of the U.S. real estate market. From April 2022 to March 2023, foreign investors purchased residential properties worth $53.3 billion. Most investors come from Canada, Mexico, and China, but there is a noticeable increase in investors from Latin America and Europe. This trend shows that a global community is actively taking advantage of the opportunities offered by the U.S. real estate market.

Which U.S. Real Estate Markets are Most Promising for Foreign Investors?

The U.S. has a broad real estate market, offering lucrative opportunities in various states. Typically, foreign interest is higher in regions with high immigration rates, where investors prefer to work with brokers and consultants from their own countries of origin. According to the National Association of Realtors, some of the most popular regions among international investors include Florida, California, Texas, and New York.

Why Do Foreign Investors Prefer the U.S. Real Estate Market?

The main reasons that attract international investors include:

• Risk Diversification

• Stable and Predictable Market

• Positive and Predictable Cash Flow

• Possibility of Financed Acquisition

• Low Interest Rates and Extended Payment Terms

• Long-Term Appreciation

• High Returns on Investment

  
  

Key Tax Aspects for Foreign Investors

Investing in the U.S. real estate market can be a lucrative opportunity for foreign investors, but it involves several tax aspects that require attention. With complex tax laws and different obligations depending on the type of investment, it is crucial to understand how taxes work to avoid unpleasant surprises and ensure compliance with regulations.

Income Tax in the United States

Foreign investors are subject to taxes on income generated by their properties, such as rental income and property sales. Income tax in the United States is progressive, meaning the tax rate varies depending on the amount of income generated.

• Rental Income: Income from rentals is considered taxable income and is subject to federal income tax. Although foreigners are not required to pay the same rate as American citizens, they are still obligated to pay tax on that income. The federal tax rate for rental income may vary depending on the type of legal entity used (for example, individual or LLC).

• Capital Gains Income: If a foreign investor sells a property, they will also be subject to capital gains tax. The capital gains tax rate depends on how long the property was held and the amount of profit obtained. If the sale generates significant gains, a tax rate of up to 20% may apply.

FIRPTA (Foreign Investment in Real Property Tax Act)

One of the key tax obligations foreign investors face when selling property in the U.S. is FIRPTA, or the Foreign Investment in Real Property Tax Act. This law requires that when a foreign investor sells a property in the U.S., a 15% withholding tax on the gross sale price is applied. This tax is withheld by the property buyer and sent to the Internal Revenue Service (IRS).

The withheld tax can be adjusted later, depending on the investor’s tax situation, but FIRPTA represents an important obligation for foreigners intending to sell real estate in the U.S.

Estate and Gift Taxes

Foreign investors should also be aware of estate and gift taxes. The estate tax in the U.S. may apply when an investor passes away, and the tax rate depends on the total value of the estate being transferred. If the estate’s total value exceeds a certain amount, the tax can be significant.

For foreigners, the estate tax is limited to U.S.-based assets. Therefore, properties located in the U.S. may be subject to this tax, while assets outside the U.S. are not. The estate tax rate can reach up to 40%, depending on the property’s value.

Strategies to Minimize Taxes

Although the U.S. tax system is complex, there are several legal strategies that foreign investors can adopt to minimize their tax burden. One common approach is using a Limited Liability Company (LLC) to hold real estate. In addition to offering personal liability protection, an LLC can provide a more favorable structure for taxation on rental income and capital gains.

If an LLC owns property in the U.S., there are various deductible expenses that can reduce the LLC's taxable income, such as:

• Maintenance and Repairs Costs: Necessary maintenance and repairs to keep the property in good condition are deductible. This includes:

  • Plumbing, electrical, or heating repairs

  • Painting and minor renovations

  • Replacement of floors, windows, or roofing

  • Major improvements that increase property value may be depreciated over time

• Property Management Costs: If the LLC hires a company or individual to manage the property, property management costs are deductible. This may include:

  • Property management fees

  • Manager or administrator fees

  • Employee salaries (if the LLC hires staff directly)

• Advertising and Marketing Expenses: If the LLC rents out the property, advertising and marketing expenses are also deductible.

• Interest on Mortgage Loans: If the LLC finances the property purchase with a mortgage loan, interest paid on the loan is deductible.

• Depreciation: Depreciation allows investors to amortize the property's value over time. For residential properties, depreciation is spread over 27.5 years, and for commercial properties, over 39 years.

• Utilities and Operational Costs: Utility payments (water, electricity, internet, etc.) made by the LLC are deductible.

• Legal and Accounting Fees: Legal and accounting fees related to property management and tax preparation are deductible.

• Travel Expenses: Business-related travel expenses, such as airfare, accommodation, and local transportation, may also be deductible.

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Due to the complexity of tax laws in the United States and the risk of penalties for non-compliance, it is highly recommended that foreign investors seek the assistance of tax consultants specialized in international taxes. They can ensure compliance with all tax obligations and provide guidance on the best ways to structure real estate investments to optimize taxes and minimize risks.

Fortunately, the Ace Advisors team has over two decades of experience assisting foreign investors. We have globally trained specialists ready to develop tax solutions tailored to meet the specific needs of those looking to invest in the U.S. real estate market.