IL Postcard

The Tax Man Cometh…or Maybe Not

Date: 04/04/2008

Saturday, April 5, 2008

Learn more about international real estate taxes in International Living Postcards—your daily escape

Nobody likes to think about taxes, and, if you’re like most people, you probably try to ignore them altogether until tax season rolls around each year.

That strategy can cost you big time, especially if you’re investing in real estate in multiple jurisdictions.

In that case, the right time for you to think about taxes is every time you consider a purchase…and before you sign on the dotted line. Recognize that every time you make an investment in real estate you could be creating income tax obligations for yourself both in the country where you’re buying…and back home, as well: obligations to do with rental income, eventual capital gains, and annual property taxes.

The good news is that it’s possible to substantially minimize these tax burdens if you organize things properly and in advance. Often, the critical factor is how your investment is held.

The bad news is that getting this right can be complicated. You need good advice from someone who has experience working with foreign buyers in the particular jurisdiction where you’re buying.

Let’s start with rental income. This, in fact, can translate to tax benefits. In the U.S., for example, you can enjoy a depreciation allowance on the rental property. In addition, if the property is leveraged (that is, purchased with financing), you also can deduct the mortgage interest, not only on your U.S. taxes, but in many other jurisdictions, as well.

In the case of a leveraged rental, therefore, you’ll typically be able to show a loss on your U.S. tax return for the first few years of ownership...even if you have strong positive cash flow.

Most countries don’t allow depreciation of the property itself when calculating the net rental income; however, they generally do allow the other deductions you would expect, including depreciation of furniture. You can also deduct the cost of visiting the country to check on the property (meaning tax-deductible vacations a couple of times a year). All of this means that, again, with a leveraged piece of real estate, you aren’t likely to have taxable income in the country where the property is located, either...at least not for the first few years.

What about capital gains?

This is where you can realize the real tax benefit to investing in real estate in multiple jurisdictions. Most countries allow preferred tax status for capital gains. Right now in the U.S., the capital gains tax rate is 15%. In Panama the rate is a mere 10%. However, in New Zealand, Argentina, Croatia, France, the U.K., and other countries, the capital gains tax rate for real estate is zero. This, of course, can make a big difference to your total return.

In some cases, restrictions apply. For example, in the U.K., you must be a non-resident to escape capital gains.

What about your U.S. capital gains burden? Good question…for, as an American, you’ve always got to remember it along with the capital gains bite in the country where you’re investing.

You could either offset the capital gains tax paid locally against your capital gains tax due to the IRS...or, in the case of not having paid any capital gains taxes when selling your real estate in New Zealand, for example, you could arrange for what is called a 1031 like-kind exchange. There are restrictions and rules to follow to qualify, but, frankly, this deferral option is the global real estate investor’s best friend. It allows you to take and then to reinvest all of your gains, investment after investment.

The bottom line is that if you organize your international real estate purchases properly, it is possible to defer or completely avoid income and capital gains taxes entirely...and legally.

Lief Simon
For International Living

P.S. Property taxes are a tax you can choose not to pay. Several countries don’t charge them...others charge only small amounts. Croatia, Ireland, and Buenos Aires (the city only, not the rest of Argentina) all levy no property taxes.

Editor’s note: Why pay too much on taxes…when the money saved could go toward a trip back to the States or a relaxing vacation? Don’t let the tax man take more of your hard-earned money than he’s entitled to…order the hot-off-the-presses Expatriate’s Tax Bible: The Complete Guide to U.S. and Foreign Taxes for the American Abroad today…and save $41 thanks to our Anniversary Sale.

Read related articles:

- The Party Line on Taxes

- Tax Deadline Looming? Get 6 More Months

- The IRS Want Theirs, but Theirs Can Be Less