Crazy for Real Estate
There is no asset that international families are fonder of than real estate. Successful families everywhere generally consider real estate ownership to be a smart and stable asset in which to hold one’s wealth, and foreign citizens in particular seem to have a cultural predisposition to owning property. In most countries, wealthy families frequently maintain a large majority of their wealth (outside of business assets) in property.
We understand and agree with this attitude, and view real estate ownership as a fundamental long-term objective for most families. And, in fact, the vast majority of the international families with whom we work—including both foreign-born families and Americans citizens who live abroad—own both the home they live in and at least one other property.
But, owning real estate can also drive you crazy, if you are not prepared for its associated challenges.
Why own real estate, especially abroad?
A primary residence is often a person’s first major investment, for the obvious benefits of its use and enjoyment while anticipating stable appreciation over time. It is a bedrock component of a diversified portfolio. Many people also view property as part of the family legacy that they wish to preserve and pass down.
You might have tremendous interest in property solely as an investment, as the owner can benefit from the capital appreciation and create reliable income over long periods of time. Many countries offer tax incentives to owning property as well. Property ownership is a well-trodden path to creating wealth.
Some of the ancillary reasons to own property abroad include the ability to diversify yourself geographically, both from an investment and a currency perspective; the flexibility to plan your global retirement; and the means sometimes to secure a visa or residency in a different country. Unfortunately, in some places as a non-resident, it can be sometimes difficult or more expensive to secure a mortgage, or there can be outright restrictions on foreign or non-resident ownership.
Buying a property is usually an expensive proposition, and the expenses do not end with the purchase. We all tend to focus on the rental income and discount the costs, which include income tax, property tax, maintenance, and insurance. Some of our clients actually do not even track the true net profit (or loss!) they are experiencing from the properties they own.
Real estate can be a terrific asset to own over time, but it is illiquid and not appropriate for everyone if there is too much concentration in one property or type of property.
Real estate will be taxed in the country it is located in, and it can be taxed as well in the owner’s country of residence. This is true for rental income as well as potentially capital gains or estate taxes. Fortunately, there is almost always tax treaties and treatments so that the property is not double taxed, but the owner will end up paying the higher of the two countries’ taxes. Below are a few other tax-related issues that you should consider.
- Many countries have a capital gain exclusion for a primary residence. The U.S. has this as well, up to a $500,000 limit for married tax filers and a $250,000 for single tax filers. The exclusion is lost if the home is not a primary residence for 2 out of the prior 5 years, so people who leave their homes and rent them out need to be aware of this.
- As a cross-border property owner, there will be two sets of accounting rules for taxes and therefore potentially two different cost bases. To add insult to injury, there are also currency fluctuations in the mix. For example, from a U.S. perspective, everything must be reported in U.S. dollars at the exchange rate as of the transaction date, so the owner could potentially have a gain in one currency and a loss in another or maybe creating an artificially larger tax liability in one country than the other. What a headache!
- It is also common practice for a country to impose a higher tax rate and a required tax withholding on non-resident property owners, with the attendant higher administrative burden.
Being a landlord, and especially an absentee landlord, is never fun, and things do go awry. You must have a robust contact list of tradesmen. It may be best to hire a property manager, which would curtail your profits more.
You will need a bank account that can handle normal payment transactions in that currency, which often has to be opened in person. And, if your plan is to build a retirement living in multiple locations, then there are other daily life considerations such as a driver’s license, medical insurance and care, and visa or other legal restrictions.
Finally, an often overlooked area is estate planning. Real estate will fall under the estate laws of the country where it is located, regardless of the residency of the owner. Countries do have differing treatments regarding estate or inheritance taxes and even who is allowed to inherit, so planning on this front is essential.
Owning property abroad is a hallmark of being a global citizen. It can create a fantastic lifestyle, even for generations to come, if planned for and managed thoughtfully.