Whatever rumors may be circulating about foreign buyers in the United States, most signs indicate that foreign buyers continue to be welcome in the U.S. market and taking advantage of its many opportunities. In a 2017 CityLab article, Richard Florida reported that between April 2016 and March 2017, foreigner buyers purchased $153 billion worth of U.S. properties or 284,455 homes. This represented a jump of 50 percent over the previous year. Moreover, despite widespread assumptions that most foreign buyers aren’t actually living in their new homes, Florida reports that an estimated 60 percent of foreign buyers are living in their U.S. properties some or all of the time.
What has changed in recent years is where foreign buyers are purchasing. If New York City was once among the top destinations for foreign buyers, this is no longer the case as states with lower tax liabilities, including Florida and Arizona, continue to attract a higher percentage of non-resident and non-citizen buyers. Nevertheless, if you’re a foreign-based buyer or someone living in the United States on a temporary visa or Green Card, there are still many reasons to consider buying in New York City. Before you do, however, there are a few things you should consider whether your plan is to invest or search for a U.S. home or piéd-a-terre.
What has changed in recent years is where foreign buyers are purchasing. If New York City was once among the top destinations for foreign buyers, this is no longer the case as states with lower tax liabilities, including Florida and Arizona, continue to attract a higher percentage of non-resident and non-citizen buyers. Nevertheless, if you’re a foreign-based buyer or someone living in the United States on a temporary visa or Green Card, there are still many reasons to consider buying in New York City. Before you do, however, there are a few things you should consider whether your plan is to invest or search for a U.S. home or piéd-a-terre.
1. Prepare for Financing Obstacles
If you’re looking to buy a home for your own use, you may require financing. This can be challenging for foreign buyers, but it is not impossible. In fact, an estimated 40 percent of foreign buyers do have some form of financing.Generally, if you’re a permanent resident (someone who holds a Green Card), seeking financing will not pose many additional obstacles. Green Card holders are generally subject to the same rules as U.S. citizens and even eligible for low down payment FHA loans. Unfortunately, virtually no New York City co-ops and few condos accept FHA loans, which often enable buyers to bring as little as 3.5 percent to the table.
Non-permanent residents—for example, people on E1, E2, H1B, H2A, H2B, H3, L1 and G1-G4 visas—should expect to face greater obstacles. After all, if you’re not a permanent resident, you will be considered a higher risk by most banks and may struggle to find a lender. If you’re a foreign national (someone whose primary residence is not in the United States), you can expect to face even more obstacles. Foreign nationals don’t meet Fannie Mae and Freddie Mae standards, and this means that banks who lend to foreign nationals must assume all the risk. As a result, even foreign nationals who do secure financing are nearly always expected to raise a much higher percentage of their down payment (on average about 70 percent).
2. Understand the Difference Between Buying in a Condo and Co-op
While foreign citizens can purchase property in the United States and in New York City, some types of buildings are more foreign-buyer friendly than others. For example, as a rule, if you’re a foreign buyer, condos are generally more available than co-ops. There are two reasons for this difference.First, many co-ops don’t permit subleasing or only permit subleasing after a certain period of time has lapsed. In fact, owners generally must occupy a co-op unit on the continuing basis (e.g., for two or three years) before they can legally sublease. If your goal is to invest, this is an obvious deterrent. Second, unlike other types of buildings, co-ops in New York City have considerable latitude when it comes to choosing who can and cannot live in their buildings. While they technically can’t discriminate on the basis of national origin, religion, or ethnicity, they can legally make an argument for choosing more desirable tenants, and American citizens are generally preferred because they are assumed to present a lower financial risk. While there is no clear indication that foreign buyers regularly abandon co-op properties in New York City, this is nevertheless the argument made by many co-op boards when vetting prospective buyers.
Fortunately, in sharp contrast to co-ops, condos are generally much easier to purchase whether you’re a U.S. resident or foreigner. With a high number of new condos currently on the market, especially in Manhattan, some developers are even going out their way to attract foreign buyers by translating their websites into other languages. For example, The Kent, an amenities-rich condo in the Upper East Side, has a mirror site translated into Chinese. If condos are more foreign-buyer friendly, it is primarily because they generally have few or no restrictions about subleasing—making them ideal for investors—and don’t have the same motivation to carefully vet potential tenants. After all, when you buy in a condo, you’re buying a unit from a developer rather than a group of shareholders who also live in the building.
3. Understand Your Tax Liabilities
The Foreign Investment in Real Estate Property Tax (FIRPTA) is a withholding tax applied to foreign sellers of property. As explained on the IRS website, “FIRPTA authorized the United States to tax foreign persons on dispositions of U.S. real property interests.” Notably, in this context, a “disposition” includes but is not limited to a “sale or exchange, liquidation, redemption, gift, transfers, etc.” The withholding is 15 percent (10 percent for dispositions before February 17, 2016) of the amount realized on any acquisition. If the seller has paid their tax on time, the tax is refundable, but if not, FIRPTA effectively offers some guarantee that foreigners can’t make money on U.S. real estate market without paying their fair share of federal taxes.While all foreign sellers are subject to FIRPTA, if you’re a foreign seller in New York City, other taxes will also apply to any sale. In New York City, non-residents pay an additional capital gains tax of 8.82%.
Finally, in addition to FIRPTA and New York city’s own non-resident capital gains tax, foreign sellers should also be prepared to pay any taxes faced by U.S. citizens. To begin, a capital gains tax is applied to 21% of the net capital gain on all sales (this is the amount of money a seller earns on a sale after subtracting the original purchase price paid, closing costs, and the costs of any property improvements). In addition, if you’re selling a “mansion,” which refers to any property worth more than $1 million dollars, which now includes most properties in Manhattan, you’ll face an additional 1% tax whether or not you’re a U.S. citizen.
Is Investing in New York City Still a Good Idea for Foreigners?
Given the potential obstacles non-residents and non-citizens face while purchasing and selling, one may wonder whether New York City is still a strategic place to buy. While there is no question that many foreign buyers are migrating south to locations where both values and tax liabilities are generally lower, the market remains strong.CityRealty’s monthly report for October 2018 found that the number of residential sales was up in the four weeks leading up to September 1st, and the aggregate sales total, $2.0 billion, was the same total as the prior month. And while the same report also found that the average sales price for all units, including co-ops and condos, dipped slightly during this period from $2.2 million to $1.95 million, 2018 has remained consistent with average sales prices never dipping below $1.9 million, nor exceeding $2.3 million.
The current market suggests that even with the higher tax liabilities now facing foreign sellers, New York City’s market continues to hold great potential for strong returns whether one is looking for a short-term investment or to buy and hold.
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Contributing Writer
Cait Etherington
Cait Etherington has over twenty years of experience working as a journalist and communications consultant. Her articles and reviews have been published in newspapers and magazines across the United States and internationally. An experienced financial writer, Cait is committed to exposing the human side of stories about contemporary business, banking and workplace relations. She also enjoys writing about trends, lifestyles and real estate in New York City where she lives with her family in a cozy apartment on the twentieth floor of a Manhattan high rise.
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