February 17, 2011
By Staff Reporter
The ins and outs of buying a place is a road not easily navigated, and foreign buyers are bound to run into more loopholes than U.S. citizens and legal residents.
Normal practices in American real estate dealings, such as escrows and title insurance are new to foreign buyers, and on top of that, securing financing can be more difficult if you have no credit history in the U.S. The Irish Echo spoke to some legal professionals to learn more.
Devil in the resale
David Keusch, an attorney with the Kris, Feurstien and Katz firm in Manhattan, said that much of the legal wrangling should come with selling the apartment later on, as opposed to buying it.
The IRS enacts a withholding called FIRPTA, which is a tax on foreign sellers. It calls for 10 percent of your profit from the sale to be withheld, which could be “a huge amount,” according to Keusch.
The city and state also enact their own taxes on foreign sellers.
One way to avoid any unnecessary payments, because they do happen, is to plan ahead. If you know you are going to be selling, you should let the IRS know how much you stand to make, if at all.
The tax is so the government can make sure you are not making a profit off a quick sale without paying some penalty. Keusch said it only takes about 45 days of advance notice
If you can estimate how much of the sale will be a profit, you will not have to pay any overages later.
Still, planning ahead is one thing many people lose sight of when buying property.
“Most people don’t,” said Keusch, but advised that if you are foreign and selling property in New York, you should “definitely” plan for FIRPTA in advance.
He said it often eats up profit, negating the benefits of selling in a hot market, as sometimes up to 15 percent of the profit can be taxed.
Buying smart
Keusch went on to say that buying “wouldn’t be that different from a citizen,” but there are things to consider.
Kevin McConnell and Elizabeth Donoghue are both partners at Manhattan’s Himmelstein, McConnell, Gribben, Donoghue and Joseph law firm.
Foreign buyers might see their status “come into play in a co-op situation,” said McConnell, explaining those groups’ unfettered right to refuse someone on the basis of whatever they want.
Some co-ops are leery of people not maintaining the property on a constant basis, which is an issue if the person only plans to use the property once in a while.
How they choose to purchase is also taken into consideration. As most co-ops refuse financing, they want to make sure a buyer’s money is liquid, and may require that a portion gets deposited in an escrow fund while the transaction is worked out.
Co-ops probably would “prefer cash,” said McConnell.
Donoghue concurs, especially in dealing with meticulous co-op boards.
“It depends on the board and the size of the building,” she said. “Some will care very much,” where you are from and what you plan to do in their building.
The details will prove vital. Whose name you put the property under is a serious concern. If you buy a property under a corporation name, that can make you liable for double the taxes.
Estate taxes can also be a problem in worst-case scenarios. If an owner dies, anything above $60,000 is up for taxation, and that can be as much as 45 percent. A foreign buyer might want to think twice before taking sole and direct title ownership of a property. Some lawyers recommend living trusts for that situation.
The same goes for “gifts,” such as adding a spouse onto a title.
If you are buying the property to invest and rent it out, condos tend to be a little more flexible. They have a system called “first refusal,” which will have the condo association pay you rent for your unit if they do not want a stranger moving in. This is becoming increasingly the case as more condos run their buildings like co-ops.
McConnell said it is vital to consult with a legal expert when you begin the process and to tell them exactly what you plan to do with the property to avoid any missteps.
Legal eagles
Not surprisingly, all the lawyers the Irish Echo spoke to thought it was a good idea to have an attorney — a specialist in real estate and not, for example, divorce — working with you on any home purchase, doubly so for a foreign buyer.
“Even if you’re not foreign,” said Keusch, you should have a lawyer, because you could easily lose out by being unfamiliar with the process.