5 Mistakes Made in Foreign National Home Loans
By Milo • 8/25/2021
As a foreign national interested in investing in U.S. real estate, you have most likely faced several hurdles and stumbling blocks. Even with a high net worth, many foreign nationals struggle to gain U.S. real estate financing access. There’s $2 trillion in residential real estate owned by foreigners in the United States, and 70% of them bought it with cash because nearly 60% of foreigners couldn’t get financing or move their money.
What does all of this mean? In the U.S. real estate market alone, foreign nationals have an estimated $1.3 trillion in trapped equity — money that is tied up in illiquid assets and isn’t able to be moved easily.
Investing in U.S. Real Estate as a Foreign National
Here at Milo, we’re proud of our product. We’re reimagining finance for global consumers and our mission is to make financial products accessible to everyone. As foreigners in the US, we knew that, unfortunately, this was not the case.
Feeling like we’re being left behind and neglected in the financial revolution, we knew we had to do something. Our solution was to create Milo for global consumers who were just as frustrated.
It can also be difficult for foreign nationals to understand the rules of the U.S. tax system. Failure to comply when it comes to international investing can quickly and easily jeopardize your ability to build wealth through effective and efficient investing successfully. With this in mind, let’s talk about 5 of the most common investment mistakes made by foreigners in the United States, including investing in U.S. real estate.
Failing to Report Investment Income From Assets Outside the U.S.
There are some exceptions, but as a general rule, foreign national residents in the United States are subject to taxation on their income around the world, the same as US citizens. However, foreign nationals often don’t know this and regularly opt out of reporting international financial assets, especially those acquired prior to coming into the U.S. Delaying reporting too long can result in large tax penalties that must be paid in order to be in compliance.
Allowing a Complicated Tax System to Derail Investing
While the U.S. tax system is admittedly complex, and not disclosing your assets or investment income property can be expensive, it is important not to forgo investing together. All too often, however, this is exactly what happens. Foreigners in the U.S. who are overwhelmed by the tax system and its implications often do not invest at all, preventing them from reaping the benefits and consistent growth of a well-diversified investment portfolio.
Not Understanding Tax Implications of Assets Retained in the U.S.
Foreign nationals who acquire investment assets in the United States, including real estate, continue to own those assets even after leaving the country. As a result, they need to be aware of the US estate tax rules. When assets owned by foreigners not residing in the United States (non-resident aliens) value more than $60,000, there is an estate tax (any asset valued below that threshold is exempt). When assets owned by foreigners not residing in the United States (non-resident aliens) value more than $60,000, there is an estate tax (any asset valued below that threshold is exempt).
Not Realizing the Benefits of Keeping Assets in U.S. Investments
It may come as a surprise, but in many cases, leaving your assets in United States investments may be a smart and advantageous choice for foreign nationals. Financial assets owned and held by foreign nationals are not subject to the U.S. capital gains tax. These dividends and interest are still subject to withholding tax, even if it’s usually reduced to 10-15% thanks to international treaties.However, there is a surprising benefit — this withholding tax can be recovered in your country of residence in the form of a tax credit. What does this mean for you, as an international investor? The simplest way to explain it is, even after you go home or leave the U.S., you’ll still reap the benefits of the investing environment here, which is usually better and more profitable than any other market.
Failing to Understand Tax Implications of Investing in U.S. Real Estate
Lastly, many foreign nationals simply don’t understand all of the tax implications of investing in United States real estate. Directly owning real estate subjects foreign, non-resident investors to preparing annual federal and state income tax filings. And U.S. real estate holdings can also subject non-resident foreign aliens to a more complicated tax structure under the FIRPTA, or Foreign Investment in Real Property Tax Act. Suppose you are foreign and plan to invest in U.S. real estate while living outside of the U.S. In that case, it is important to work with a financial advisor who knows the ins and outs of investing as a non-US citizen, who can help to ensure that your portfolio is diversified and that you will see the returns you’re looking for.