It's a common progression here in America. We go on our dream vacation. We fall in love with the place. We want to buy a home in our new favorite place. If you're one of the over 38 million Americans who traveled overseas in 2017, you may have come home feeling the same way.
Perhaps you want to purchase a home because you plan to spend every vacation there. Or maybe you've always dreamed of retiring in tropical climes. There’s also the possibility that you’ve been toying with the idea of turnkey investing and your latest vacation destination checks all the important boxes.
Before diving in it's important to realize how buying a home abroad will differ from the process you're familiar with here in the US.
To help your international transaction go as smooth as possible here’s some advice on the Who, Where, and What to know when purchasing a property abroad.
Who Should Help You?
Did you know if you purchase a home in an overseas country, there’s no guarantee that you can automatically take up residency there? In fact, it’s not a given that you’re eligible to stay long-term in the country. And if you plan to live there on a permanent basis, you may not be able to get a job.
Some countries have very strict, and sometimes convoluted, policies when it comes to non-residents and real estate investing.
For example, the process for buying property is much simpler and “foreigner-friendly” in Costa Rica than it is in Mexico or Thailand. That's why it's an absolute necessity to find a real estate agent familiar with the nuances of foreign ownership.
In this situation, it may be beneficial to choose an international real estate company based in America. Larger companies often have referral networks. An agent in your home state facilitates the step-by-step process, working in unison with the agent from wherever it is you're buying. In effect, you get two for the price of one.
Where is the Right Place?
Falling in love with an overseas locale doesn't mean it makes good sense as a long-term investment. There are several things you should research before making such a big financial decision:
- The cost of living
- The average price per square foot of various properties in different areas of the country
- Historical patterns of rates for currency exchange (this can have a major impact on the price of your property should you decide to sell)
- The current economic situation as well as predictions for how economically stable the country will be in the future
- The political climate and the sentiment of natives toward foreigners
- Any tax liabilities that may be involved
The last one deserves a bit more explanation and is discussed in more detail in the following section.
At the very beginning of the process when your excitement is peaking you may not consider the fact that at some point in time you might need to sell your property. All the above factors, and many more need to be taken into consideration to set yourself up for a good return on your investment.
What’s Important to Know in the Financial Arena?
When purchasing property overseas it’s important to know the options you have for financing. In many countries, it's not as simple as getting a loan from your local bank.
In 2016, for example, several of the largest banks in Australia made dramatic changes to their foreign lending policies.
According to Bloomberg, “Westpac said it will not accept applications from non-residents, self-employed foreigners and temporary visa holders living overseas. The bank also reduced the loan-to-value ratio for mortgage applicants with foreign income to 70% from 80%.” More and more countries are scrutinizing their foreign investment procedures, making it more difficult for non-residents to buy properties.
In some countries, you may even be required to obtain a special life insurance policy that is specifically for mortgage protection. This ensures that any debt is paid in full if a deceased homeowner has not yet paid off the mortgage on the property.
And, as the saying goes “There’s nothing certain in life but death and taxes.” And the tax implications for certain properties can start to add up, making it a less-than-favorable investment. A financial advisor, accountant, tax attorney or possibly your real estate agent can guide you through these three important variables regarding taxes.
- Property taxes: The amount of property taxes imposed varies from country to country. There are some that don’t have any. In some instances, cities levy taxes on foreign-owned properties.
- Vacancy taxes: Certain countries, and some cities, will charge a vacancy tax if your residence is unoccupied for a predetermined length of time.
- Tax on rental income: If you’re familiar with rental property investing, you’re aware that you must declare that as income on your federal tax return. When a country chooses not to offer tax treaties to non-residents you may encounter a situation in which you are doubled taxed.
The laws regarding international taxes are complicated. Failure to report accurate income numbers or file timely tax returns can result in some very stiff fines.
If you have someone prepare your returns, it’s important they understand all the required paperwork. As CPA Valerie Chambers explains “...the penalties may have no relation whatsoever to an underlying tax liability. For example, Congress has imposed steep penalties for the failure to timely file or substantially complete certain international information returns…”
Why: The Final Factor
The answers to “Why buy a home in another country?” are too numerous to list. It a very personal thing and varies based on the individual making the decision. As mentioned in the introduction, the property may serve as a home-away-from-home, the final forever-home, or a real estate investment.
Regardless of your reason, the decision is yours to make.
Hopefully, you feel a little more prepared to make an educated and sound real estate purchase decision. Have you encountered other obstacles not mentioned? Please share your life lessons with the rest of our readers.