Purchasing a Property in California as a Foreign Buyer
Foreign buyers represent and important segment in the real estate market in the United States. According to the National Association of Realtors between 2012 and 2013 foreign real estate buyers purchased over $68 billion in U.S residential Real Estate accounting for more than 6% of total home sales.
This guide will help you as a foreign buyer get started in everything related to purchasing a property in the United States. We recommend you consult with experienced Real Estate Broker, Accountants, Attorneys and Mortgage Brokers as your personal situation might require specific guidance. If you need a recommendation we will be happy to refer you to a professional within our trusted network.
How U.S Real Estate Works
How Real Estate is purchased in the United States varies from State to State. In this guide we will review how Real Estate transactions are carried out in the state of California. Our company specializes in helping international buyers purchasing real estate in San Diego as well as foreign investors in San Diego.
MULTIPLE LISTING SERVICE (MLS)
In the United States Real Estate Information is shared by agents and brokers within different companies or brokerages using the Multiple Listing Service (MLS). Almost all real estate listings are posted to the Multiple Listing Service within 24 hours of coming up for sale. This is done to ensure that all current listings are available for all agents to share with their clients.
In websites like ours you can find up to date listing information and properties for sale listed by all Real Estate companies in the area without having to go from company to company to see what properties might be available for sale. In most other countries there is no collaboration among agents and to find properties available for sale you would have to go from agent to agent to see their book of available listings.
BROKERAGE FEES OR COMMISSIONS
In most countries it is typical to pay a fee to have an exclusive agent searching available properties for you. In the Unites States the commission is always paid by the seller of the property and then divided equally between the buyer’s agent and the seller’s agent . Therefore you as a buyer won’t have to pay anything out of your pocket to enlist the services of an exclusive buyer’s agent to represent you in the purchase. Therefore it is highly advisable to work with an experienced broker or agent who will protect your interests and not those of the seller in a transaction.
BROKER & AGENT EDUCATIONAL REQUIREMENTS
Another major difference within US Real Estate practice and those practices abroad is that in the United States Real Estate agents and brokers need to have a license and meet educational guidelines to operate. Many other countries do not require any sort of licensing for an individual to operate as a Real Estate agent or broker.
Getting Ready to Buy a Property
Personal Identification and Visa Requirements
To purchase a home in the United States you do not need to be a US citizen or permanent resident (green card holder). Any individual can purchase a property in the United States. To do so, you have to prove who you are typically by presenting a copy of your passports and immigration VISA (if applicable).
Buying Real Estate in the United States does not grant you a special immigration status allowing you to stay longer than your designated VISA permits. For information on investment VISAS we recommend you contact an immigration attorney specializing on the subject matter. You can contact us if you need a reference we will be happy to provide one.
To purchase Real Estate in the United States a foreign citizen must obtain a Individual Tax Payer Identification Number (ITIN). This is a number assigned by the Internal Revenue Service (IRS) to foreign nationals. To obtain an ITIN, a non-U.S. citizen must complete, sign and deliver an IRS Form W-7 to the IRS with supporting documentation to prove the identity of the applicant.
Determining the type of Property and how the Property will be used
Before you start searching for a property it is important to determine what type of property you want and the type of use the property will get. A house will require more maintenance than a condominium but a house is usually priced lower (per square foot) than condominiums. On the flip side, condominiums typically have Home Owner Association costs (for the use of the pool, general maintenance, security, fitness center, etc) that might not have. We will cover different costs associated with home ownership later in this guide.
Some things to consider before starting your property search are:
- Will this be a vacation home?
- Will this property will be used to generate rental income?
- Will this property be purchased for a short term while kids are studying in the United States?
- Is this an investment for the long run and the main objective is capital appreciation?
Buying a Property
Working with a Local Broker
As a foreign buyer it is very important that you find a local professional to work with you and with whom you feel 100% comfortable with. You should seek an agent that is professional, experienced working with foreign buyers, courteous and willing to guide you throughout the Real Estate purchase process. Consider the time difference with your home country and find someone willing to call you in the middle on the night or after hours if that is what it takes. Furthermore, trustworthiness, reliability and integrity are critical attributes of any agent you might consider to represent you.
It is important that you use a buyer’s agent who will represent you and your interests, not the seller’s interests. In California, it is standard practice for there to be two real estate agents involved in the transaction; one will represent the seller, while the other will represent you. There is no cost to you as the buyer for the services of a real estate agent as the commission is always paid by the seller of the property.
Buying the Property Cash Vs. Mortgage Financing
Another thing to consider when buying Real Estate in the United States is they type of purchase you will do. Cash purchases can be closed in as fast as 7 to 15 days while financed purchases typically take 30 to 60 days to close due to the amount of additional paperwork needed to secure a mortgage loan.
Availability of financing is limited to foreign buyers but there are several lenders that will offer a mortgage to you as a foreign buyer.
BBVA Compass will offer loans up to $1 million to foreign buyers from countries in which they have a branch. This loan requires a 25% down payment.
HSBC will offer mortgage loans to current clients that have a minimum of $100,000 in deposits with the bank.
There are several other direct lenders that have a foreign national loan program. Please contact us for additional details of if you need a reference.
Most lenders require foreign buyers to present extensive paperwork to demonstrate financial stability and ability to repay the loan. Examples of paperwork that might be needed are:
- Copy of Passport and or Visa.
- Bank statements that show deposits for a specific quantity.
- Investment account statements that show assets for a specific quantity.
- Letter from a creditor or other credit references (like for example credit card, car loan, etc) indicating your account was always paid on time and never late.
- Letter from an accountant if you are self employed.
- Letter from your employer if you are employed by a company.
Obtaining Home Insurance
Every mortgage lender will require a home buyer to purchase home owners insurance to protect the property from potential damage (water, fire, etc) and natural hazards (earthquakes, etc). The cost of the insurance polity will vary based on the size of the property and the requested coverage level.
Costs Associated with Owning a Property in California
Purchasing Real Estate in San Diego has costs implications besides the purchase itself.
PROPERTY, CAPITAL GAINS & INCOME TAXES
A Foreign Investor will generally pay income tax like a United States investor on its real estate income and the Foreign Investor will pay tax on capital gains derived from a sale of United States real property like the U.S. taxpayer.
If the property is purchased for rental purposes income taxes will have to be paid yearly. The United States government requires foreign nationals to pay U.S Income taxes on any net income (revenues less expenses) produced by the property. The tax amount paid depends on the amount of net income produced by the property. A foreign tax payer can elect to pay income taxes on their rental property in this manner or a flat 30% income tax will be assessed (unless there is a special tax treaty with the foreign investors home country).
Under direct ownership (property held under the individuals name) the current long term capital gains tax is assessed at 30%. This tax rate could be different if the property is held under a US corporation, foreign corporation or limited liability company. It is important to consult with a tax advisor to determine which form of ownership is most beneficial to you.
Property taxes are also paid yearly and range between 1.1% and 1.2% annually depending on the municipality where your property is located. For example on a $500,000 property you will have to pay approximately $5,500 per year in property taxes. Property taxes are paid in two installments every year.
PROPERTY MAINTENANCE & HOME OWNER ASSOCIATION (“HOA”) FEES
Other costs to consider are the maintenance costs of the property. If you purchase a house you will have to consider the costs of maintaining the home like for instance the cost to hire a gardener, a pool maintenance person, a house keeper and so forth. Furthermore if the house is located on a gated community that offers amenities (security, pool, fitness center, etc) there will be a monthly “Home Owners Association” Fee that typically ranges from $150 to $1,000 depending on the type of amenities offered. Generally, the more the amenities the more the monthly HOA fees will be.
Purchasing a condominium will save on maintenance costs such as gardener, pool person, etc but will always incur a monthly “Home Owners Association” fee. For downtown San Diego condos monthly HOA fees range from $300 to $1,500 depending on the type of services offered. Some buildings offer basic services and others offer full service amenities such as door man, 24 hour security, pool, fitness center, sauna & steam room, guest suite, conference room, community lounge, movie theater and more.
If you are purchasing the property for rental purposes you will probably want to enlist the services of a property manager to maintain and administer your property. The property manager will be in charge of renting out the unit, finding a suitable tenant, screening the tenant to ensure its a good candidate for your unit and maintaining the unit in working order. Property managers typically charge 8% to 10% of rental proceeds to manage and administer the property.
More About Taxes and Forms of Ownership
Direct Ownership, Limited Liability Company or Corporation
The issue of taxation when purchasing real estate in the United States is often confusing, however, it is one of the most important things to evaluate when purchasing real estate in the US in order to avoid issues, penalties or overpaying for taxes for not being well informed.
International buyers of Real Estate in the United States should consider enlisting the services of a tax adviser to determine which form of ownership would be the most beneficial to their situation or unique set of circumnstances. There are several options and the most common are direct ownership, limited liability company and foreign corporation.
The advantages of direct ownership include its simplicity and that the owner will enjoy preferable capital gain tax rates. The disadvantages include exposure to the U.S. estate tax.
Purchasing through a limited liability company might offer tax incentives but a special tax treaty between specific countries and the United States might cancel out those advantages.
Purchasing through a foreign corporation has the advantages of anonymity, limited liability for the shareholders, and avoidance of the US estate tax. The disadvantages are the ordinary corporate income tax rates that have to be paid.
United States Estate Tax
The estate tax is the tax imposed on a property when a non US owner dies and the property passes on by inheritance. The estate tax is levied at a rate of 35%. Persons considered U.S. tax residents enjoy a credit that shelters the first $5.25 million of their assets from taxation, as opposed to foreigners who have only a $60,000 credit. In other words, when a foreigner dies owning U.S. real estate, an estate tax is levied on the value of that property in excess of $60,000. If the foreign investor is from a treaty country or is survived by a U.S. citizen spouse, then the investor may find some relief from the estate tax burden.
There are two ways to avoid the Estate Tax, one would be obtaining a life insurance policy sufficient to pay the US Estate Tax. Another would be to set up a foreign corporation to own the property although this form of ownership will affect the income tax level paid. This is why it is highly advisable to consult with a tax adviser to determine which form of ownership would be the most beneficial to your specific situation or unique circumstances as a foreign investor as there could also be a special tax treaty between the United States and your home country that might benefit you.
FIRTPA: Foreign Investment in Real Property Tax Act
FIRPTA is a withholding tax required of a foreign seller. The FIRPTA withholding tax amounts to roughly 10% of the gross sales price. If the seller is current on all of their other taxes owed to the IRS (i.e. income taxes, capital gains tax, etc.) then they should receive a refund of the 10% that was withheld at the sale.
FREQUENTLY ASKED QUESTIONS
No, you do not need to be a US citizen to purchase a property in the United States. You will need a valid foreign passport as proof of identity.
In California there is no need to hire an attorney to draft a Real Estate purchase contract. However, it is advisable to consult an attorney or an accountant regarding how you should take title to the property as different types of ownership have different tax implications.
As a foreign buyer you can purchase US Real Estate directly in your name or through some sort of business entity such as a corporation, limited liability company, real estate investment trust, etc. It is advisable to consult an attorney or an accountant regarding how you should take title to the property as different types of ownership have different tax implications.
Yes, cash purchases can typically be closed in 7 to 30 calendar days. Purchases using a mortgage loan will take 30 to 60 days to close. Cash buyers also save a substantial amount of money on mortgage application fees, loan origination fees, appraisals, title insurance and other lender fees.
Purchasing a property with a mortgage loan will have fees ranging from 3% to 5% of the purchase price. Typical fees associated with a mortgage loan include mortgage application fees, loan origination fees, appraisals, lenders title insurance and other lender fees.
Purchasing a property with cash will incur minimal fees that are limited to paperwork, legal, recording, administrative fees (typically called “Escrow” fees) and title insurance fees. They typically range in the $2,500 to $5,000.
A title insurance policy gives the buyer his rights of ownership and ensures that a third party won’t ever be able to claim ownership of the property.
Yes, home inspections will be scheduled and coordinated by your real estate agent to ensure you are buying a property free of problems. If the inspections find problems with the property you can back out of the purchase or request credits to fix the problems. Typically home inspections that are done are:
- General Home Inspection
- Termite Inspection
- Roof Inspection
- A/C Inspection (Air Conditioning)
- Septic Tank Inspection
No, it is not necessary to be present for closing. If you are purchasing with a mortgage loan and a document needs to be notarized this can be done at the local United States Embassy or Consulate in your country of origin. Another option is to execute a “Power of Attorney” in which you authorize another person to sign documents on your behalf.
Depends. Your tax liability in your home country will vary depending where you are from and if your country has a tax treaty with the United States. Please consult a tax attorney to find out details specific to your home country.
Yes, the United States government requires foreign nationals to pay U.S Income taxes on any net income (revenues less expenses) produced by the property. The tax amount paid depends on the amount of net income produced by the property. If tax returns are not filed on time, a tax of 30% of the gross rental income may be assessed.
Property taxes range between 1.1% and 1.2% annually depending on the municipality where your property is located. For example on a $500,000 property you will have to pay approximately $5,500 per year in property taxes. Property taxes are paid in two installments every year.
Federal long-term capital gains tax (property held for more than 1 year) is 30% for foreign citizens.