The foreign investor market was a hot topic of conversation in the last few years, and specificalyl targeting the Chinese investors.  In fact, we first drafted this post in early 2014 when the buzz was still in the air.  Though it’s fizzled a bit since, then, there’s been a slew of interesting new regulations that are hatching its way into the real estate market in efforts to prevent “dirty” money being utilized in real estate purchases. It’s crucial for a foreign investor purchasing or selling real estate in NYC (or and adviser to one) to understand the type of transaction to pursue, how to finance the deal, and the implications arising from owning property in the United States.

 

CHINESE BUYERS

According to NBC, Business Insider and The Real Deal, Chinese buyers comprised of the largest community of foreign buyers of New York Real Estate—both in volume and sales.  Contributing to their surge in purchases was the willingness of Chinese buyers to purchase real property without conducting an in-person viewing.[1]  Sites like Juwai.com allow potential investors to connect with international real estate agents, and became increasingly popular with foreign buyers. Business Insider reported that Juwai.com referred $1.1 billion worth of potential real estate transactions in July to December 2013. Rising reliance upon the Internet pushed Chinese investment to record heights with their total investment in overseas properties reaching $13.5 billion in 2014.[3]  As of October 2015, the Wall Street Journal reported that Chinese buyers “have started to pull back, scared off by China’s stock-market selloff, slowing economic growth, currency devaluation and tightened restrictions on capital outflows.”[10] Still, Chinese buyers spent a median price of $500,000 on homes, and totaled nearly 18% of all cash deals.[2]

 

IDEAL REAL ESTATE TRANSACTIONS FOR FOREIGNERS

In Manhattan, the landscape is roughly 75% cooperative apartments, and about 25% condominiums.[4]  Because cooperative boards are generally more restrictive on transfers of shares, foreigners should narrow their real estate search to condominium units or townhouses, which have less stringent restrictions on transfer of ownership. Regardless, foreign purchasers should still be ready to divulge much of their financial information when buying into a condominium as most condominium boards will require a board application nonetheless.

 

FINANCING THE TRANSACTION

As a foreign investor, you’re likely pursuing all cash transactions because financing is harder to obtain due to stricter underwriting requirements, a smaller investor pool and the added difficulty of verifying the borrower’s proof of funds and financial history.  However financing, believe it or not, is NOT impossible. There are several portfolio and/or correspondent lenders that offer loan products to foreign investors, albeit most are with a lower loan-to-value ratio (say 50% to 60% of the property value) compared to the typical 80% on a traditional loan.  The largest hurdle I’ve seen on the financing side is the investor’s own country’s regulations or currency controls.  Many lenders will want to see the cash equity that an investor is putting down in the borrower’s account for at least 60 days  With China’s currency control regulations (which currently imposes a $50,000 cap upon transfers out of the country per year, per person) and the recent crackdown on the Chinese purchasing insurance policies to circumvent such restrictions[11] some of these transactions can get flagged for review over concern of corrupt money and may not be as easy for the investor to pool their money into the States without a significant delay.

 

CLOSING COSTS ON U.S. PROPERTY FOR FOREIGNERS

New York City closing costs on a purchase are exactly the same for foreigners as they are for U.S. persons. If the purchase price is over $1,000,000, then there is a NYS 1% Mansion Tax collected. There is a 1.8% mortgage tax when mortgaging under $500,000 and a 1.925% mortgage tax when mortgaging over $500,000. When selling any property in the United States, there is a Foreign Investment in Real Property Tax Act (FIRPTA) withholding, which is 15% for foreign individuals (as of February 17, 2016) and is the liability of the purchaser or purchaser’s representatives to withhold and remit.  If the sale of a residence is intended for personal use by the buyer and does not exceed $300,000 then there is no withholding requirement. If the sale of a residence is intended for personal use by the buyer and exceeds $300,000, but does not exceed $1 Million, then a withholding of 10% is required.  Be sure to consult your CPA for more information.

 

EB-5 VISAS & MORE HYPE

Under the Immigration and Nationality Act, foreigners who invest at least $1,000,000 in creating a new U.S. business or expanding an existing one are eligible for a conditional green card. The business must employ at least 10 U.S. full-time employees, produce a service or product, and benefit the U.S. economy. The foreign investor must be actively engaged in the company. There is an exception to the $1,000,000 minimum investment if one invests at least $500,000 in a Targeted Employment Area[7], that is, a high-unemployment or rural area. [8] Several regional centers exist to serve investors in facilitating and meeting these requirements. It should be noted that the EB-5 investor’s primary focus is on obtaining a visa/green card, and not a return on investment. Be sure to consult an immigration attorney for more information.

 

ESTATE TAX CONSIDERATIONS

Perhaps the one of the most discerning considerations for a foreign investor are the tax implications upon death. When a foreigner owns a property in the United States, and the owner has passed, then any tangible or personal property located in the U.S. valued over $60,000 requires the filing of a New York estate return[9]. New York State estate taxes can be as high as 16% of the value of the property. For example, if the value of said property were $2,000,000, then the New York estate tax would be $320,000.00. The additional federal estate tax varies depending upon the value of the estate.

An Irrevocable Life Insurance Trust (ILIT) is a trust primarily set up to hold one or more life insurance policies. The main purpose of an ILIT is to ease the burdens of estate tax. If the trust is drafted and funded properly, your beneficiaries should receive all of your life insurance proceeds unabridged by estate tax. With an ILIT, the trust is the owner of the insurance policy, which keeps the proceeds of the life insurance out of your taxable estate. In addition, you make gifts to fund the insurance premiums to reduce your taxable estate. After your death, the trust’s assets (the insurance proceeds) are available to your beneficiaries income-tax-free. This is a big benefit as the estate taxes listed above can be quite substantial.

ILIT’s can also be a key source of funding for beneficiaries to help pay the estate taxes. The beneficiaries of an ILIT can use the proceeds from the life insurance policy to offset some of the taxes that may be owed on the estate. This can help keep the assets that are part of the taxable estate available and intact for beneficiaries. This strategy can be especially useful if a large portion of the estate consists of real estate or a closely held business and one would want to ensure that one’s family would not be forced to sell those assets in order to pay all of the estate taxes.

 

 

[1] Frank, Robert. “Rich Chinese Are Top Foreign Buyers of U.S. Real Estate – NBC News.” NBC News. National Broadcasting Channel, 08 July 2014. Web. 24 Oct. 2014.

[2] http://www.marketwatch.com/story/chinese-all-cash-buyers-of-us-homes-have-tripled-since-2005-2015-10-09

[3]http://www.realtor.org/sites/default/files/2014%20Profile%20of%20International%20Home%20Buying%20Activity.pdf

[4] http://www.hallmarkabstractllc.com/new-york-city-real-estate-market-co-op-vs-condo-rules-of-the-road/

[5] Orlik, Tom. “In Reversal, Cash Leaks Out of China.” The Wall Street Journal. Dow Jones & Company, 15 Oct. 2012. Web. 28 Oct. 2014.

[6] “Faux Pas with Foreign Buyers.” RSS. Katherine Clarke, 01 July 2012. Web. 28 Oct. 2014.

[7] A rural area is any area outside a metropolitan statistical area (as designated by the Office of Management and Budget) or outside the boundary of any city or town having a population of 20,000 or more according to the decennial census.

[8] http://www.uscis.gov/working-united-states/permanent-workers/employment-based-immigration-fifth-preference-eb-5/eb-5-immigrant-investor

[9] http://www.tax.ny.gov/pit/estate/etidx.htm