New York City's stature as a cosmopolitan city with a long history of multi-cultural influences attracts both local residents and foreign buyers to invest in NYC real estate. If you are a foreign citizen purchasing a pied-à-terre apartment or an investment property, there are additional laws and regulations you should be aware of before you buy.
Prevu recently sat down with real estate attorney Paul M. Giddins to get his insights on the most common questions our agents receive from international buyers. Mr. Giddins is the founding partner of Giddins Claman LLP and has been practicing real estate law in New York for over 25 years.
Paul M. Giddins: Yes. A non-U.S. citizen is not prohibited from purchasing real estate in NYC, but there are many considerations that a foreign buyer needs to be aware of before proceeding with the transaction. The foreign purchaser should also check the relevant law and requirements of his home country.
Many purchasers choose to own NYC real estate in the name of an entity, such as a limited liability company (LLC). This provides privacy for the purchaser since the ownership documents that are publicly recorded do not include the individual purchaser’s name.
Another advantage is that anyone seeking to sue the owner of the property is limited to the entity’s ownership interest in the apartment. The personal assets of the owner of the entity (other than the apartment) cannot be attached to satisfy a judgment obtained in any such lawsuit.
A very important reason for a foreign buyer to own property in the name of an entity is U.S. estate tax: for estates of individual U.S. citizens, the first $11,400,000.00 of the estate’s value is currently not subject to federal estate tax. However, for the estate of a non-resident alien decedent, only the first $60,000.00 is exempt.
Thus, the estate of an individual foreigner who dies in 2019 owning an apartment valued at $10,000,000.00 would be subject to estate tax on $9,940,000.00. Careful planning with an accountant or tax attorney is required to avoid this unfortunate result.
Another consideration is the NYC co-op/condo tax abatement. If the property (a co-op or condo apartment; this does not apply to single family or multi-family houses) will be the buyer’s primary residence, they will not qualify for the 17.5% NYC real estate tax abatement that is granted to co-op and condo owners where the apartment is a primary residence. The property must be owned personally (and be a primary residence) to qualify – if owned by an LLC, it does not qualify. Needless to say, in most cases this will be outweighed by the estate tax consequences described above. Another important consideration is the U.S. Treasury Department’s disclosure requirements for cash purchases (i.e., no mortgage) by entities, discussed below.
“FIRPTA” stands for Foreign Investment In Real Property Tax Act of 1980. FIRPTA is the procedure that the U.S. government uses to collect capital gains tax on the sale of property by a foreigner or non-resident alien when the price is greater than $300,000.00.
Since it would be very difficult for the Internal Revenue Service (“IRS”) to collect capital gains tax when the proceeds of a property sale have been taken out of the country, what happens is that 15% of the gross sales price (10% if the price is less than $1,000,000.00) is paid to the IRS at closing (it must be remitted within 20 days of closing), the IRS then calculates what the capital gains tax is after IRS form 1040-NR is filed by the foreign Seller, keeps the amount of the capital gains tax and returns the difference to the foreign Seller. This can result in a lengthy wait for the foreign Seller to receive the non-taxed remainder, depending on when form 1040-NR is filed. It is particularly frustrating when there is a minor capital gain or no gain at all.
There is an alternate procedure that can be used to reduce the waiting time. The foreign Seller can apply before closing for a “Withholding Certificate” from the IRS. If that is done and proof of the application is provided at closing, then the 15% amount is held in the escrow account of the one of the attorneys until the Withholding Certificate is received. The funds can then be disbursed as soon as the Withholding Certificate is received, and the Seller does not need to wait until after form 1040-NR is filed.
In either case, the foreign Seller is required to obtain a U.S. taxpayer ID number in order to file the required FIRPTA forms.
YES. This applies both to U.S. citizens and to foreigners. When residential real estate is purchased by an entity in New York City (and several other selected areas around the country) on an “all Cash” basis (i.e., no mortgage) and the price is more than $300,000.00, the Financial Crimes Enforcement Network (“FinCEN”) of the U.S. Treasury Department requires title companies to report the identity of the individual who controls the entity.
The purpose of this reporting is to aid the government in uncovering money laundering and other illegal activity related to All Cash purchases of residential real estate by entities. This does not apply if there is an institutional mortgage or if the All Cash purchaser is an individual and not an entity.
YES, although a U.S. taxpayer ID number would probably be required, and banks may have additional underwriting requirements and more limited loan products.
No. The additional taxes are generally paid at the time of sale (although a foreign buyer should check the tax requirements of his/her home country). The 1% NYS “Mansion Tax” paid by buyers of residential properties where the price is over $1,000,000.00 applies to both domestic and foreign buyers.
Foreign sellers pay the same closing costs and NYC and NYS transfer taxes as all other sellers (1.425% for the NYC transfer tax (1% if the price is less than $500,000.00) and .4% for the NYS transfer tax). In addition, a foreign seller is subject to FIRPTA as described above and is also subject to NYS income tax withholding if the Seller is not a NYS resident or the property was not a primary residence for two of the five years preceding the closing. The NYS income tax is 8.82% of the net gain.
Yes, as long as the general requirements for a 1031 exchange are met and the foreign investor has a U.S. taxpayer ID number and files a U.S. tax return.
Paul M. Giddins is an experienced New York City real estate attorney. He has been practicing real estate law in New York for over 25 years and is the founding partner of Giddins Claman, LLP, a midtown Manhattan law firm specializing in New York real estate.
If you have more questions about this topic or other real estate legal services, you can connect with Mr. Giddens at:
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DISCLAIMER: This material was provided for informational purposes only, and is neither intended to provide, nor should be relied upon as tax, legal, or accounting advice. Prevu and its subsidiaries do not provide tax, legal, or accounting advice. You are encouraged to consult your personal tax, legal, or accounting professionals before considering any transaction as your individual situation may vary.
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