New York City real estate for the foreign purchaser

Just last week, I was fortunate enough to be in London, a city I truly love and have been able to get to know over numerous visits. As an agent in New York City, I wanted to meet with the team at W.A. Ellis and learn about the similarities and differences between our markets. In the process of our conversation, Lucy Morton, Senior Partner at W. A. Ellis, invited me to write a guest article about the process of structuring a real estate transaction for foreign purchasers in New York City. I am happy to do so, and also pleased to note that the United States taxation and capital gains laws are quite favorable for foreign purchasers. The New York City real estate market is unique, however, and a little knowledge in advance of beginning the process of purchasing can be very helpful.

The rules for taxation and capital gains are the same for foreign nationals as they are for citizens or resident aliens. If a property produces rental income, foreign nationals are only required to file and pay income taxes on U.S. source income. Foreign nationals are similarly subject to estate taxes and gift taxes only on their U.S. assets. When selling a U.S. property, foreign nationals are held to the same capital gains taxation as citizens or resident aliens. The only difference is that foreign nationals selling their property are subject to FIRPTA (Foreign Investment in Real Estate Act), in which the purchaser withholds 10% of the gross sales price and either sends it to the IRS places it in an attorney’s escrow account until the capital gains tax has been paid, at which point the seller receives a refund of the remaining funds minus the capital gains tax.

So what to do if you have decided to take the plunge and purchase a home in New York City, whether to live in, use as a pied-a-terre, or as an investment? The first step I would recommend is to assemble a team of professionals to help you in the process. A real estate agent is the logical first member of the team, and can also help you assemble the other key members – a real estate attorney (required to deal with a contract, and useful if you want to consider buying as a limited liability corporation, or LLC), an accountant to help with matters of taxation and estate planning, and perhaps a bank loan officer (although, for reasons discussed later, most transactions with foreign nationals are all-cash). A good real estate agent will be able to provide the names of recommended professionals who are familiar with the nuances of a transaction with a foreign purchaser. Let me also note that I am a real estate agent, not an attorney or an accountant, so all legal or accounting information in this article is subject to review by those more qualified members of your team.

The next step would be in deciding whether you are looking for a townhouse, condominium, or a cooperative apartment. A townhouse is real property, solely owned by one entity (either an individual or an LLC), and you are personally responsible for the payment of all maintenance, utilities, real estate taxes, and insurance for the home. Although townhouses are relatively rare in New York City, they can be an excellent choice for foreign nationals since there is no application package, and no limits on renting out the property for income.

A condominium is also real property, and the purchaser owns the interior space of the apartment as well as a share of the building’s common areas. Real estate taxes are paid directly based on the assessed value of the apartment, and in addition, there are monthly common charges that pay for the upkeep of the common areas. There is an application process, but rejection is generally limited to the board’s right of first refusal. Condominiums traditionally have been less restrictive regarding the application process and rules regarding renting out the apartment, but today some condominiums can have an extensive board package and stringent rules. A good real estate agent can let you know in advance how difficult a particular condominium building can be, particularly important if you plan to rent out the apartment for income. A sponsor apartment in a new development can be particularly attractive to foreign investors, since there is no board package required in this situation. Closing costs can be higher in sponsor apartments, however, since transfer taxes are generally paid by the seller but are paid by the purchaser in a sponsor apartment.

Cooperative apartments are very common in New York City, but rare elsewhere. In a coop, the entire building is owned by a corporation, and purchasers receive shares of stock equal to the value of their apartment. In addition, the buyer receives a proprietary lease that allows residency in the apartment. Real estate taxes are paid by the corporation, and the shareholder pays a monthly maintenance that includes their share of real estate taxes, interest on any underlying mortgages on the building, and the cost of running the building (a percentage of this is tax deductible). Coops are run by an elected board from within the pool of shareholders, and most have lengthy board applications and require an interview. A potential buyer can be turned down by a coop board without being given a reason, and many coops (but not all) are less likely to approve a foreign purchaser because of the difficulty in verifying income and assets. Coops generally do not allow subleasing for rental income, or have restrictions on doing so.

Is it difficult for foreign purchasers to move money into the United States? Generally not – many experienced attorneys have escrow accounts and allow the buyers to wire the deposit, purchase price, and closing costs to this account and write the checks for the buyer. Getting a mortgage as a foreign purchaser can be less easy – often there is a maximum loan amount of $1.5 million, a requirement of a 12-24 month cash reserve and large deposit held at the bank, and it can be difficult to verify employment and assets. For these reasons, most foreign purchases of real estate are all-cash.

The intellectual reasons for owning property in New York City as a foreign national are real: favorable tax treatment, and a historically strong appreciation of value. However, as a resident of New York City, I would like to add that there are a multitude of intangible reasons to own a part of this vibrant city as well. If you are interested in finding out more about purchasing real estate in New York City, feel free to contact me.

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