The complexity of United States tax law and the penalties associated with noncompliance can be daunting for the increasing number of foreigners eager to invest in United States real estate, several international tax experts told The Commercial Observer.
The Foreign Account Tax Compliance Act and the Report of Foreign Bank and Financial Accounts are only a few of the acronymic accounting regulations foreign investors and accountants are now faced with navigating in order to successfully acquire property in the United States from afar.
Despite those complexities, however, foreign investors are still increasingly attracted to a real estate market they perceive as comparatively stable amidst uncertainty in Europe. Indeed, during the second quarter of 2012, global investor purchasing activity in the United States grew by 33 percent from the previous quarter, according to a Jones Lang LaSalle Global Capital Flow Report.
The report, released this summer, determined that the United States moved back toward the $40 billion transactions mark, with around 35 percent of deals involving cross-border parties. Jones Lang LaSalle ranked New York third among the most attractive cities in the world for cross-border investments, after London and Paris.
“Since New York has been very attractive, especially for Europeans, at least for the past 10 years, New York accounting firms have definitely increased the focus on foreign investors,” said Todd Hedgpeth, director of the international tax division of Holtz Rubenstein Reminick LLP.
Accounting firms are redoubling their efforts to meet the concerns of their international clients. “The main issue for foreigners investing in real estate in the United States is that the tax rate is very high,” said Ryan Dudley, a principal and international tax practice leader with Friedman LLP.
Tax rates in London or Singapore might be competitive, he added. “However, with the right planning, many pitfalls can be avoided,” Mr. Dudley said.
“Foreigners owning United States real estate are subject to United States tax either on gross income or net income if an election is made to treat rental income as ‘effectively connected’ with a United States trade or business and are also subject to special withholding rules under the Foreign Investment in Real
Property Tax Act,” said Chris Nagle, an associate director at the international accounting firm Frank Hirth.
“Payers of income not effectively connected must withhold tax at a rate of 30 percent unless a treaty rate is available,” Mr. Nagle added.
Mr. Nagle pointed out that “the recently enacted FATCA (Foreign Account Tax Compliance Act) reporting requirements and the long-standing, but only recently publicized, FBAR (Report of Foreign Bank and Financial Accounts) reporting requirements” are among the most recent regulations foreigners and accountants dealing with foreigners should keep in mind.
From a cultural point of view, privacy can be a serious concern for foreign investors, especially from Eastern Europe and Latin America, Mr. Dudley said. “Some foreign investors are surprised to learn that the I.R.S. wants to know about their indirect interests in entities that invest in United States real estate property, and may deny deductions or estate tax relief if those foreign investors do not share information about their non-United States assets and liabilities,” he explained.