Rules for Investing in America as a Foreigner: A Primer
Raj and his wife Nila want to buy a house in America to be used as a vacation home. They are citizens of India and unsure as to the rules which dictate how they can make a property purchase. Raj and Nila have contacted several real estate agents via the internet, but have received conflicting information. What should they do?
A foreign national (someone who is not a U.S. citizen) is allowed to buy property in America provided that purchase does not threaten national security or come from someone from a hostile country.
A visa may be required for entry into the United States so that should be determined before you make plans to visit the country. Your local immigration authorities may be able to advise you or the U.S. Embassy or Consulate can also provide information. There are over 40 different kinds of non-immigrations visas, the most common being a non-immigrant visa for a temporary stay. See the U.S. Immigration visa information website for a detail of the forms of visas available.
The first step is to determine the area of the country you are interested in. You can then interview different real estate agencies and make inquiries as to your needs and desires. Are you looking for a house, a condominium, or a commercial property? What state and town would you like to look in? Ask if the agent has handled purchases by foreign nationals before and if so how many. If they have not, ask to speak to someone who has.
The second step is to find an experienced and specialized real estate attorney, preferably one who has handled purchases by foreign nationals in the past.
How to Find a Good Attorney
Ask for recommendations from your real estate agent. Typically an agent will have an established relationship with an attorney who assists in the property purchase. Ask for several names to chose from and be sure to ask if the attorney has handled property transactions between foreign nationals. Not all real estate lawyers may have experience in that field. You can visit the website www.lawyers.com and http://www.americanbar.org/aba.html for further lists of lawyers in each state and town. Try not to relay on cost alone, as the lawyer you chose will be important not only for this purchase but for further questions which may arise when you decide to sell the property. Find someone you trust. Ask to get a fee agreement in writing and be clear on what services you need, and how you would like to be contacted.
The three most important questions to ask the attorney are:
- When and how do we establish a bank account in America?
- Do we have to prove we are self sufficient?
- How should we hold title? This is important for taxation purposes and in the event one of the parties were to die. Among the options you will have are: hold title in your individual name; in the name of a trust or a corporation; in a limited partnership, limited liability company or a joint venture. A real estate investment trust (REIT) or a foreign pension plan may be other possibilities. The decision on how you take title will depend on your individual financial goals and long-term plans for the property. See: What are the most common ways to hold title?
Depending on the state in which you decide to buy, your attorney may handle the closing process from start to finish, preparing deeds and obtaining title insurance, seeing that the transfer of monies takes place on time, and recording the appropriate documents at the county courthouse. (See: State by State Closing Guide.)
Your attorney can prepare or review an existing purchase contract, looking to be sure it has the necessary safeguards and complies with the law. The contract or Purchase and Sale Agreement will be legally binding, so before you sign, you want to be sure it spells out in detail everything you need in terms of financing, time of closing, condition of the property, and that it contains safeguards which allow you to back out within a specified period of time. (See: What are contingencies and why are they so important?)
Putting it simply, a real estate lawyer will be your watchdog. He would guide you through the whole process of purchasing a real estate in the United States in order to make sure that you will be legally protected. You will have a capable and trustworthy liaison to help you out with the contract. He will also face legal disputes if any arise
Verify Cash: You will not be required to have a legal status in the U.S., however, you will be required to verify any monies over $10,000.00 which will be transferred into the country. Federal law requires anyone involved in the purchase transaction, the real estate broker, title agent, attorney or bank, to report all cash transactions over $10,000 limit to the federal government. You must be able to prove the source of that money if asked.
Federal Taxation: Non-immigrants or non-residents must pay taxes on the income made from an investment in the United States.
Individual Taxpayer Identification Number (TIN)
The Foreign Investment in Real Property Tax Act (FIRPTA) requires that foreign nationals or others who have federal tax reporting or filing requirements ( and who do not qualify for a Social Security Number) must obtain a TIN or taxpayer identification number.
The TIN number can be obtained from the Internal Revenue Service (IRS) or by a Certified Professional Accountant (CPA) approved by the IRS. This may be done when you are ready to file your tax return, or it can be issued when you purchase your property. (Check with your attorney for the requirement in your case).
You will have to fill out a Form W-7 in order to request your TIN. On the form you will be required to give a valid reason for your application. (ITIN Guidance for Foreign Property Buyers and Sellers)
You attorney can advise you if you meet one of the exceptions to the tax filing requirement, submit documents that prove your identity and foreign status and the required supplemental documents with the form W-7.
Substantial Presence Test
You will not be taxed on income made outside the United States unless you overstay your visit. When a foreign national overstays their visit they can become classified as a “Tax Resident” which can result in their income from all sources worldwide being subject to U.S. tax.
You are considered to be a U.S. resident for tax purposes if you meet the substantial presence test for the calendar year of your visit. Therefore it is essential that you keep track of the number of days spent in the United States each year.
Exceptions: there are exemptions to the specific time limits on stays for medical conditions and when you have specific connections to another country. Your attorney and accountant can help you with U.S. taxation law. Information can also be obtained at a U.S. Embassy or Consulate.
The Third and Final Step will be the Closing when the deed to the property is signed over, the funds to purchase are transferred to the Seller, and the property legally changes hands.
What Happens at Closing?
When: the date of the closing will take place according to the date specified in the purchase agreement or when all the conditions of the contract have been met.
Where: The closing will take place at your attorney’s office or at the title insurance or escrow office (depending on the local custom in the area).
Who will attend: The buyer, the seller, your real estate agent, your attorney, your mortgage broker (if you will be obtaining financing through a lender). * The seller can pre-sign their necessary documents and does not have to be present on the say day as the buyer. *
Why you need your lawyer: The escrow or closing officer is not allowed to give legal advice. They are allowed to act as an impartial third party only. Your real estate agent may explain documents and their intended use, but is not licensed to attest to their legal implications.
You may have questions as to the legality of a document or to its implications on you and only your attorney is licensed to give you that advice. It is worthwhile to note again that the closing documents will be legally binding so you want to be sure you understand your responsibilities on each paper you sign.
What documents will I have to sign?
You will be asked to sign a Closing Statement. If you are obtaining financing with a traditional lender or bank, you will sign loan documents, which can be voluminous. It is recommended to read those ahead of time (at least 24 hours before closing) and be sure you understand everything in them. At that time, you can review the closing figures and be sure they are correct. Those set of loan documents will include a promissory note, a mortgage or deed of trust, a truth in lending disclosure statement and a HUD-1 or Settlement Statement. There may be additional government regulatory forms to sign, depending on your circumstances. The seller will be responsible for signing the deed and title over to you, a bill of sale if there are personal property items included in the sale, and an affidavit of title and a statement attesting to the fact that they have done nothing to cloud the title on the property and that they know of no unrecorded contracts, easements, or leases regarding the property.
When will I be given copies?
You will be given copies of all the documents you signed at the time of closing. You can also ask if your closing if they can put those documents onto a CD for you to keep. The original deed will be mailed back to you or your attorney once it has been properly recorded in the county recorder’s office.
When can you move in?
The day you take possession will normally be spelled out in your purchase agreement. Most often it is stated as possession will take place on the day of closing. However, there are instances where the seller has requested extra time to move out, but that would only be something which you have approved of, in writing, prior to closing.
Prior to closing, go through the following Closing Check List.
Have you made a final walk-thru inspection of the property?
- Is the condition of the house or property as it should be? Are there any personal property items left behind by the Seller. Is everything in working order? Did you order a Home Warranty policy for future repairs? If so, did you review that policy?
- Are you satisfied that the Seller provided you with all required disclosure documents or any known defects on the property?
- Have you carefully reviewed your mortgage closing documents? Are the lender’s closing costs as they represented they would be? Are there any “junk fees” added on that you do not agree to? Are the names correct on the mortgage or Deed of Trust documents?
- Is the loan amount, interest rate, term of the loan, and prepayment penalty correctly stated? When will your first mortgage payment be due? Where will the payment be made?
- Do you agree with the title fees being paid to the title company, attorney, or escrow agency? Are they the same as previously quoted to you?
- Do you understand the prorations, those items or costs of which you will pay a portion of or be given a credit for? Are the prorated dates and amounts correct?
- It is clear on which day you will take possession of the property? Will the Seller hand over the keys on the day of closing or at a later date?
- Is the purchase price correct on the closing documents?
- Have you been credited for all deposits put into escrow either by you or on your behalf?
- Is your name correct on the grant deed? Is it spelled correctly, and does it include your correct middle initial? Is the manner in which you will take title stated correctly?
- Is the legal description of the property correct? Does this description conform with the one given in the title report? Are all the easements and rights-of-way properly listed?
- Were any questionable items on the title report removed or explained to your satisfaction?
- If there is any personal property included, are you being given a Bill of Sale, and do you agree with the items included?
- Are you paying for fire insurance yourself outside of escrow or through the closing agent? Is the premium correct and is the policy for a full year?
- Are the property taxes being paid in full? Ask when the next property tax bill will become due.
- Check that the return address on the Deed is where you will want the recorded Deed to be sent. (You will want to keep this official document in a safe place).
If you are out of the country at the time of closing, you can instruct your attorney to do the walk thru inspection for you and review the documents, answering any of your questions.
When you Sell
Selling a property as a foreign individual, you will be subject to a withholding requirement. This holds true regardless if you made any profit or not. Under the Foreign Investment in Real Property Tax Act, (FIRPTA), you will be subject to a 10% withholding from the sale proceeds until your tax obligation is determined.
[div class=”tipbox”]According to the US National Association of Realtors, Canadians contributed 23% of total international home sales of $82 billion in the US during the year ended March 2011. (Indians contributed 7% and the Chinese 9%).[/div]
Copyright 2011 © Sandy Gadow—All rights reserved. No part of this article may be reproduced of distributed in any form or by any means without the prior permission of the publisher. All information is deemed reliable but is not guaranteed and should be independently verified.