If you have ever thought of owning foreign real estate, but have doubts of its merits, this post is going to outline some of the primary benefits that ownership of offshore real estate entails.
It will also shed some light on the common pitfalls that Americans may encounter when acquiring offshore real estate.
Whether foreign real estate is purchased for recreational purposes, like owning a second vacation home, or it is used to help diversify one’s portfolio, a legal offshore real estate investment can be a viable option for some US citizens, but it certainly isn’t for everybody.
The primary benefits to holding foreign real estate include: portfolio diversification, tax benefits, internationalization and increased financial privacy, to name a few. Depending on how the property is used will also determine certain benefits of foreign property ownership.
While every situation is different, holding foreign real estate can help you:
- Diversify your portfolio. Domestic markets and asset classes have proven to be volatile. Almost every asset class in the US has (or is very likely to) experience bubbles that have wiped out private wealth within the blink of an eye. Unlike most paper assets, like traditional stocks and bonds, foreign real estate is a tangible hard asset with an inherent diversification element to it. Not to mention the capital appreciation and cash flow potential from rental income — both of which can be exploited further with favorable currency exchange rates.
- Take legal deductions. Certain expenses related to acquiring and maintaining foreign real estate are tax deductible for Americans. Always be sure to consult a qualified tax professional.
- Internationalize your life. Many people like the idea of having a portion of their wealth outside of their home country. In times of economic instability or political unrest, internationalizing can reduce your overall exposure to the current and future landscape. Owning foreign real estate positions your savings and wealth abroad and beyond of the grasp of an overreaching government or the grip of poor (or deteriorating) macroeconomic prospects.
- Retain more financial privacy. By simply by holding foreign real estate in the name of a trust, LLC, real estate fund, or legal partnership, you will be increasing your financial privacy, because the asset is not reportable to the US Government. However, any income that the property produces must be reported.
Now that you are aware of the some of the key benefits to investing in real estate abroad, let’s take look at some of the downsides:
- Unlike stock or bond shares, a property cannot be sold as quickly. Furthermore, it may be difficult to find a buyer for your foreign property at the exact time you wish to sell and repatriate funds. This can be due to changes in the local real estate market as well as certain legal nuances associated with the property and its locale.
- More paperwork (domestic and abroad). If you have purchased a home, you know the amount of paperwork can seem endless. When it comes to foreign property ownership, the paper work tends to be a bit heavier. This can include (but not limited to) items like legal documents relating to entity structures (sometimes required by countries) to various IRS forms, depending on how the property is to be used. On a net basis, the amount paperwork in your life will increase.
- Country risks. Typically brought about through political, economic, and currency related developments unique to the country. Any (or all) of these elements need to be considered before purchase foreign real estate.
- There are a number of ways that Americans can be scammed when investing in foreign real estate. Fraud risks can be exacerbated when deciding to head offshore and are usually caused by a lack of preparation and due diligence on the part of the investor.
As stated before, the benefits of acquiring foreign real estate make sense for some, but for others the downside cannot be justified.
Either way, it’s always best to be informed. And if you do decide to make foreign property ownership a part of your portfolio, you will need to retain qualified professionals in their respective fields.
This should include no less than a credible foreign real estate professional in the country of your choice, a resident lawyer who understands the country’s real estate laws and contracts, a domestic lawyer, and a qualified domestic Certified Public Accountant.
If you are interested in investing in foreign real estate (or you already own real estate abroad) and you have specific questions or need information regarding the implications of your offshore holdings, please contact our Onisko & Scholz team today.
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Have questions about your reporting obligations on your foreign real estate? Call us today at 562-420-3100