6 Important Considerations
If you dream of purchasing a home abroad, you’re not alone. According to a 2022 report, 92% of wealthy Americans were actively looking to purchase real estate overseas.1 While owning a home in another country can be an exciting way to expand your horizons, or take a big step toward a more permanent relocation, it’s important to carefully consider your options and make a wise purchase. The following tips can help.
#1 – Understand local residency rules.
Some countries allow foreigners to establish residency by purchasing local real estate. Other countries have restrictions on where or what type of property foreigners can own. For example, Mexico doesn’t allow foreigners to own property within a certain distance from the coast.
Research what opportunities are available to you and how that might change based on your residency status.
#2 – Carefully research the local culture and lifestyle.
Before committing to a home, make sure you feel comfortable living in your desired community. I always recommend renting a property for a year in your potential neighborhood before purchasing a home. Doing so allows you to “test drive” the community before you commit to putting down roots. Start making connections with local residents. Do you feel comfortable and safe in the community? Are you able to get around and communicate with others? Do you see yourself making local friends? Does the community have adequate services to meet your needs, such as healthcare, groceries, physical fitness, etc.?
#3 – Make a plan for financing.
Once you’ve confirmed your residency eligibility and you’re ready to purchase a home, you may need to secure financing. Following are some important financing considerations:
- Down payment –Down payments overseas are typically higher than what we’re used to in the United States. You may need to put down 30% to 40% to secure financing.
- Variable rates – Variable rate mortgages are common overseas, so it’s important to understand how your rate, and therefore your monthly payment, may fluctuate over time.
- Credit history – Most foreign lenders don’t consider expats’ U.S. credit history when determining credit worthiness. That’s why it’s important to set up a relationship with a local bank as soon as possible to begin building credit in your new country of residence. Renting for a year before you purchase a home also gives you some time to establish your credit.
- Currency – Your mortgage will likely be in local currency, which can lead to U.S. tax planning challenges. Be sure to work with your international wealth advisor to minimize your tax exposure as much as possible.
- Global accounts –Your mortgage lender will likely require information about your global accounts when you apply for credit. Be prepared to provide relevant documents.
For some U.S. expats, it makes sense to use an international mortgage lender, such as Lloyds Bank or HSBC. Others choose to use securities-backed lending, such as margin or a pledged asset line, which use an investment portfolio as collateral. However, these options typically carry extra risk and higher interest rates. Before deciding on a financing option, be sure to consult with your international wealth advisor.
#4 – Consider the potential tax implications.
Each different country, region and municipality has its own rules that govern property ownership, and it’s important to understand how your foreign real estate purchase may impact your tax obligations. Common taxes include the following:
- Capital gains tax –Many countries assess a capital gains tax on the sale of properties. Some of these taxes vary based on how long you’ve owned the property or how you use the property. For example, Germany imposes a capital gains tax on properties owned for less than 10 years but offers exemptions for real estate owned for more than 10 years. In Spain, it’s possible you won’t need to pay capital gains tax on the sale of a primary residence if you use the proceeds to purchase another primary residence.
- Wealth tax –Certain countries, such as Norway, Argentina, Spain and Colombia, impose a wealth tax on individuals whose net worth exceeds a certain amount. Real estate holdings are often included in this value.
- Property taxes –Annual property tax rates can vary greatly by country, based on the property’s location and assessed value. Some countries’ property taxes also vary based on the region, so it’s important to carefully research and understand your potential property tax obligations.
- Foreign mortgage tax – A foreign mortgage gain, also known as a phantom gain, is a U.S. tax planning challenge that can occur if the value of your current country’s currency weakens compared to the U.S. dollar between the time you took out a mortgage and when you pay off or refinance the mortgage.
For example, say you purchased a home in Portugal using euros. Years later, you sell the home. At the time of the sale, the euro has weakened compared to the U.S. dollar. In other words, the amount in U.S. dollars required to pay off the loan is less than the amount you originally borrowed. On paper, this looks like a taxable gain, even though you haven’t actually realized a gain. This “gain” is taxable as ordinary income in the United States, which can lead to a significant tax liability.
Fortunately, there are a few strategies that can help mitigate this tax exposure, such as foreign tax credit carryovers and other deductions. Be sure to consult with a qualified international wealth advisor if you have a foreign mortgage and plan to sell or refinance your property.
#5 – Update your estate plan.
Owning a home abroad can lead to additional estate planning complexities, including the following:
- Jurisdictional complexities – Each country has its own unique laws that govern the transfer of real estate upon an owner’s death. Your family may encounter difficulties if your current country’s laws conflict with U.S. estate and transfer laws. Work with a qualified international estate planning lawyer to take steps to facilitate an efficient transfer.
- Estate planning documents – Your U.S.-based will and/or trust may not be recognized by your new country of residence, which can present significant challenges for your heirs if you pass away while living overseas. It’s wise to implement a separate “situs” will to govern the distribution of real estate and other assets held outside of the United States. Additionally, if you move permanently outside the United States, it may be best to create a new estate plan entirely.
- Probate – Foreign real estate is often subject to probate proceedings following the owner’s death, which can be time-consuming and expensive. Probate can be even more difficult if the property’s executor isn’t legally recognized by your current country or if there are jurisdictional conflicts between the two countries’ estate laws.
#6 – Work with a qualified lawyer.
Before putting in an offer on a property, it’s wise to consult with a local legal professional who has experience helping American expats navigate the complexities of an overseas real estate purchase. The key is to select an independent lawyer who has no ties to the selling real estate agent or property developer.
Your lawyer should be able to advise you on local real estate markets, ownership rights and zoning implications, as well as coordinate the property’s title review.
Could you use help preparing your finances for a move abroad? Creative Planning International is here for you. We specialize in helping U.S. expats and cross-border families maximize their wealth and avoid costly mistakes. We understand the complex interactions of multi-jurisdictional tax and regulatory regimes and help clients develop operationally and financially efficient retirement and wealth management strategies. Because we serve in a fiduciary capacity, you can be confident we’re acting solely in your best interests.
