|B. Transaction Requirements
1. Buying with Cash Brought into the United States: Although cash or its equivalent is almost always acceptable, there can be issues concerning the amount, its transfer into the United States, and how it was obtained.
U.S. law provides that all cash transactions over $10,000 be reported to the federal government. The requirement for reporting involves everyone connected to the transaction including real estate agents and brokers, attorneys (lawyers), title companies, closing agents, and lenders. They may want to know how you earned the money and where it comes from in order to determine that it was legally obtained.
If you finance your real estate or business purchase with a loan from a foreign lender (bank or private) it might be considered a cash transaction because the loan is closed overseas before the property closing. Then the borrowed money is transferred into the United States to be available for the property purchase closing.
Withholding of Tax on Dispositions of United States Real Property Interests
The disposition of a U.S. real property interest by a foreign person (the transferor) is subject to the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) income tax withholding. FIRPTA authorized the United States to tax foreign persons on dispositions of U.S. real property interests. A U.S. real property interest includes sales of interests in parcels of real property as well as sales of shares in certain U.S. corporations that are considered U.S. real property holding corporations. Persons purchasing U.S. real property interests (transferee) from foreign persons, certain purchasers' agents, and settlement officers are required to withhold 10 percent of the amount realized (special rules for foreign corporations) Withholding is intended to ensure U.S. taxation of gains realized on disposition of such interests. The transferee/buyer is the withholding agent. If you are the transferee/buyer you must find out if the transferor is a foreign person. If the transferor is a foreign person and you fail to withhold, you may be held liable for the tax.
The amount that must be withheld from the disposition of a U.S. real property interest can be adjusted pursuant to a withholding certificate issued by the IRS but it is normally ten percent.
A disposition includes the sale/purchase of U.S. real estate.
- Generally speaking, in reference to the sale/purchase of real estate, the person selling the real estate, the seller, is commonly referred to as the transferor.
- The purchaser/buyer of the real estate is commonly referred to as the transferee.
- Generally speaking the amount realized is the purchase/sales price of the real estate.
- Generally speaking the buyer must find out if the seller is a foreign person. If so, the purchaser/buyer must withhold income taxes.
- The purchaser/buyer may be held liable for the tax that should have been withheld on the purchase.
One of the most common exceptions to FIRPTA withholding is that the transferee (purchaser/buyer) is not required to withhold tax in a situation in which the purchaser/buyer purchases real estate for use as his home and the purchase price is not more than $300,000.
For additional information on the withholding rules that apply to corporations, trusts, estates, and REITs, refer to section 1445 of the Internal Revenue Code and the related regulations. For additional information on the withholding rules that apply to partnerships, refer to discussion under partnership withholding. Also consult IRS Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities, section U.S. Real Property Interest
2. Financing and Credit for Foreign Buyers: Foreign buyers of real estate in the United States have the option of taking out a loan to make a real estate purchase. In rising real estate markets and usual economic conditions, there are numerous lenders (banks and mortgage brokers) that will lend money to non-United States citizens to buy real estate. In times of crisis or unusual economic conditions many of these funding sources tighten up and restrict or discontinue such loans.
NOTE: At this time in 2010 financing in the United States is very tight and difficult to get. Lender programs for foreigners are hard to find. There are a few "asset lenders" and "private money lenders" who still make loans to non-U.S. citizens for property in the United States, but their interest rates are high and terms are restrictive. So you should try to obtain funding in your country with a lender who is willing to work with you. Then make arrangements to transfer and "season" the money by keeping it in a U.S. account for a specified length of time. Then you can pay cash for your real estate purchase.
It is important that you line up financing BEFORE placing an offer on property to make sure that your loan can be approved and funded before the contract period expires. Each lender will have their particular requirements, application forms, and timing for approval. Most lenders will have different loan programs to choose from depending on your qualifications, the amount to be borrowed, and the terms of the loan. Interest rates, down payments, fees, and credit standards can vary greatly among lenders so it pays to shop for the best loan.
Foreign buyers who have no established credit history in the United States won't be known to the three credit scoring services: Equifax, Experian, and Trans-Union. Without a credit score most lenders won't be able to process your loan, so alternative forms of credit will be needed to prove that you are a good risk. Alternative credit can be letters or statements from previous lenders or other providers of services stating that you have a history of making monthly payments on-time and paying off loan balances when due. Letters or statements can be from banks, other types of lenders, utility companies, telephone companies, cable television providers, retail stores, or any place that you bought a product or used a service in advance of paying for it.
Most United States based lenders will also want to have proof of your income and ability to make payments on the loan. Salary or wage statements from an employer for the current year, income tax returns for the previous 2 or 3 years, and proof of stock dividends or interest earnings will be requested.
Almost all banks and other lenders will require that the money (funds) you use for your down payment and closing costs be deposited in a United States bank for a specified length of time. This is known as "seasoning the money." If your money is not deposited in the lender's account they will ask for proof, in the form of bank statements, from the other bank where the money is located. Sometimes it takes a few weeks to get this verification of deposit. It is not unusual for a lender to require that your funds be seasoned for 2 to 3 months.
An appraisal of the property you are purchasing will be required by the lender to make sure that the real estate or business is worth more than the amount you are borrowing. The past and existing title (ownership) will also be investigated to find out if there are any liens or claims against the property. In the case of real estate purchases an up-to-date survey of the property will also required.
3. Escrow Account for Property Taxes and Insurance: If your down payment for the purchase of a home is not over 20% of the purchase price your lender will almost always require you to have an escrow account. Along with your monthly payment of principal and interest on your loan, you will pay 1/12 (one-twelfth) of the yearly (annual) cost of property taxes and homeowner's insurance. This account will accumulate the tax and insurance payments until the end of the year when the lender will forward the full payments to the appropriate local tax collector and your insurance company.
Also, a lender may require a monthly payment of Private Mortgage Insurance (PMI) if your down payment is less than 20% of the purchase price. In case of a land purchase, no insurance will be necessary unless there is a liability risk.
If you buy a condominium, the exterior building maintenance and insurance is included in the monthly association fee. It is still wise to purchase liability insurance and personal property insurance to cover the interior and your personal possessions.
Market America Realty Group is accustomed to handling real estate transactions for foreigners. We can help you acquire, manage, and sell your real estate