Expat Taxes: Play 20 Questions When Purchasing Foreign Real Estate

Matthew Apodaca, CPA

It is popular today for American expats to buy foreign real estate as they prepare for retirement abroad. Investing in foreign real estate is a fascinating opportunity to expand your horizons, experience other cultures, and possibly generate income. With the many opportunities to invest abroad it is important to remember that investing in ANY real estate should be treated as a financial investment, not a tax write off.

There is no real tax benefit to owning rental property: Yes, you can offset rental income with expenses, but you cannot take deductions for losses. We often hear clients rationalize their choices with, “Yeah, but I can deduct the mortgage interest and property taxes.” Remember, tax savings are a percentage of your tax deduction. At a 30% tax bracket, a $10,000 deduction reduces your tax by $3,000. To put it in perspective, let me ask you this: Is it better to pay $20,000 in mortgage interest and real estate taxes to save $6,000 in taxes… or is it better to keep $20,000 and pay $6,000 in tax? Avoid the false comfort of chasing tax deductions (spending hard-earned money to ‘save’ on taxes) it is never a winning game.

We have all heard stories about folks that have become rich riding a foreign real estate boom. However, it is on the tax side that we see intelligent do-it-yourself investors go bankrupt investing in foreign real estate. It is easy to be swept up in the dazzling glamour of investing in foreign real estate and miss some key issues that can make it the worst investment of your life.

In EVERY real estate purchase, the financial benefit to you is made on the BUY side, so make sure you are getting the best value for the property. In addition to searching for the very best real estate deal you can find, the following items should be carefully considered with your U.S. tax professional AND a tax attorney in the foreign country of choice.

1. Am I making money on the buy (below market) or paying market price for the property?
2. What are my long-term plans for this property?
3. What are the U.S. and foreign tax ramifications of these plans?
4. How should the property be titled and why?
5. When/how long am I planning to live in this property?
6. Who will manage the property when I’m not there?
7. If I rent it, what is my return on investment after I factor in interest, taxes, insurance, and upkeep expenses?
8. What if I can’t get a renter?
9. What if I need to evict a renter?
10. What if a tenant damages my property?
11. What are my tax responsibilities in the foreign country if I rent or sell the property?
12. Will real estate in my investment location continue to appreciate?
13. How will I know if another real estate bubble is building in this area?
14. What is my exit strategy if I need to get out of this property in a hurry?
15. How does holding this asset affect the diversity of my entire financial picture?
16. How liquid is this investment; what is length of the current sales cycle?
17. Who will take care of the day-to-day maintenance needs?
18. What about repairs if something breaks?
19. What kind of insurance should I have? Do I need fire and flood insurance?
20. How does all this work if I am thousands of miles away from the property?

Remember, it is often MUCH easier to get INTO a foreign property purchase than it is to get OUT of it. We always recommend that an investor spend at least a month renting a flat in the region under consideration. Staying locally allows you to interview and network with local professionals as well as inspect and experience the local culture. With every foreign contract, you want to be sure that you are working with a reputable foreign tax attorney in addition to a tax professional with experience in U.S. and foreign tax.

These kinds of conversations are all part of our overall services to our clients at NCH Tax & Wealth Advisors. Please contact our office if you have any questions: (866) 729-6425. We are happy to help provide the direction you need.

Please feel free to pass this along to anyone you think might benefit from this information. We appreciate all referrals.