Tom Zachystal is President of International Asset Management providing financial planning and investment advice for Americans living abroad.
Buying property abroad is a dream for many Americans. But whether you already live abroad or want a vacation property, rental property or “plan B,” many Americans underestimate the financial implications. Where and what property you buy affects taxes, cash flow and estate planning, and there are normally currency considerations to factor in as well.
The difference between a smooth or frustrating financial experience usually comes down to planning ahead. In this article, we’ll explore some of the issues you should think about before you buy.
1. Understand your U.S. tax and reporting duties.
The U.S. has a citizenship-based tax system. This means that whether you live in the U.S. or abroad, all U.S. citizens must report their worldwide income. This includes rental profits and capital gains for foreign properties. Furthermore, if your foreign bank accounts combined ever hold more than $10,000, you must file an FBAR (Foreign Bank Account Report). If your foreign financial assets (again, combined) exceed IRS thresholds that start at $50,000, you must also report them on Form 8938. So if you transfer funds to a foreign account in your name to purchase a property, you’ll often trigger these reporting requirements.
If you own foreign real estate through an entity, there’s even more reporting. Consult a U.S. tax advisor specializing in cross-border taxes to help minimize your U.S. tax and reporting.
2. Consider foreign property in the context of your financial plan and investment portfolio.
The decision to buy foreign property should be weighed as carefully as any other investment in your portfolio. Real estate is often illiquid and highly concentrated, so a purchase abroad can create unintended imbalances if it represents too large a share of your net worth. On the other hand, it can be a great way to add diversification to your portfolio, in terms of both asset types and currencies.
Consider how foreign property complements your other holdings and whether it supports your long-term objectives like retirement or legacy planning.
3. Choose the right ownership structure.
How you hold the property matters as much as the property itself. Direct ownership keeps reporting simple, though it leaves you exposed to personal liability. Some buyers prefer an LLC, which can provide liability protection, but increases reporting and potentially taxes. In my experience, structures like LLCs can be useful in the U.S., but they may have unintended consequences for local taxation if you live abroad or if the property is located outside the U.S.
4. Compare financing options.
Financing property abroad can be different from financing at home. Many foreign banks require larger down payments from Americans and may charge higher interest rates. Loan terms may not align with what you expect in the U.S. Also consider currency risk, as a mortgage in euros or pesos paid from U.S. income could cost more if the dollar weakens.
For this reason, if possible, I recommend matching the loan currency to the currency of your income. Also check that a foreign mortgage qualifies for the U.S. mortgage interest deduction.
5. Consider currency and political risks.
Aside from mortgage payments, currency swings can affect your ability to pay general property expenses, as well as the value of the property itself.
Political risk is less obvious but equally important. Property rights differ around the world. In some countries, foreigners cannot hold land directly, or ownership laws change with little warning. Always research how property titles work locally and buy title insurance when it is available.
It’s also worth planning how you’ll transfer money overseas, both for the purchase and potentially for maintenance and other ongoing costs. U.S. banks charge high fees and have high exchange rates. Using a currency specialist like Wise or MoneyCorp can save you thousands.
6. Create a cash flow plan.
Before purchasing, map out all the related costs, both for the purchase and afterward, within your overall cash flow plan. Transaction costs surprise many Americans buying abroad. For example, some countries charge transfer taxes of 2% to 10% that buyers must pay up front. Annual property taxes can also range from negligible to significant depending on the country and region. Then there are maintenance costs, insurance and banking fees. Some countries also charge an annual wealth or asset tax on property as a percentage of the property value.
If you hope to earn rental income, check the local rules. Some countries welcome short-term rentals, while others ban or restrict them. There will also likely be local taxes to pay on rental income, as well as U.S. taxes.
7. Update your estate plan.
Foreign property can complicate inheritance. Some countries apply forced heirship rules that dictate who receives what. A U.S. will alone may not control the property, so you may also have to draft a local will that matches your U.S. estate plan. This can prevent legal conflicts and protect your heirs.
In some countries, such as France for example, it is possible to separate the right to use the property from ownership rights, which opens the door to gifting the ownership of the property to your heirs early on and still retaining the right to use a property for your lifetime.
Estate planning is not just for wealthy investors, and even a modest overseas apartment can create problems if left unmanaged.
8. Work with cross-border professionals.
Working with a team of cross-border experts (like those at my company, though you have many options in this space) helps you avoid both legal and financial traps and could save you more money than they cost. A typical team includes a local attorney, a bilingual real estate agent, cross-border financial and U.S. tax advisors, and a local tax professional familiar with working with Americans.
Final Thoughts
Buying real estate overseas can be rewarding, both personally and financially. The difference between a dream investment and a financial headache often comes down to preparation and good advice. By addressing taxes, ownership questions, financing and estate planning early on, you’ll give yourself the opportunity to enjoy your property rather than worry about it.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
Forbes Finance Council is an invitation-only organization for executives in successful accounting, financial planning and wealth management firms. Do I qualify?