New York real estate, especially in Manhattan, has always been a highly coveted asset. Every year, the city attracts more international buyers, all of them looking to get their slice of the Big Apple. Unfortunately, the past year has seen several changes put a dent in what usually is a fast-paced and busy foreign market. Much of the blame can be attributed to the dollar’s strength against; the yen and euro, but also several domestic issues. 2020 is an election year, a time that always causes market jitters. Also, the NYC market experienced some waves last year when changes were made to the mansion tax. A series of rent reforms and broker fee developments have made the business of being a landlord more complicated.
Taken together, all this has made the NYC market enter a cold phase for international buyers. Fortunately, there is some good in this. A colder market means less competition for those buyers still interested. It also means a high chance of scoring a better deal at a time when many sellers are fighting each other tooth-and-nail to attract a buyer. But if you’re an international buyer that’s eager to enter the market, then there are essential things you need to know. Buying real estate in NYC as a foreigner requires a few extra steps and considerations. Regardless of the state of the market, these are some timeless considerations every foreign buyer needs to take into account. Below are the five most important ones.
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Better a Condo than a Co-op
Cooperative buildings (co-ops) make up around 75% of NYC’s housing stock. They can range in size from simple 1-bedroom units to super-deluxe penthouses. Unfortunately, due to their ownership structure, foreign buyers won’t find it easy to buy one. As you can probably guess from the name, co-op buildings function somewhat like a corporation. Instead of receiving a deed, buyers receive shares (the number of which depends on how large their unit is). But anyone who hopes to become a shareholder has to navigate a very intrusive vetting process by the building’s co-op board. Buyers will have to meet strict financial requirements, make numerous disclosures, and provide references. Additionally, co-op’s have strict subletting policies, often not allowing an owner to sublet. The whole thing can be very unappealing for foreign buyers, many of which won’t meet the financial requirements anyway since they will need to provide US tax returns.
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Buy a Condo
The easiest option, and always has been, is a condominium. Like co-ops, they can come in all manner of sizes and will include common spaces that all residents can share, such as lounges and gyms. But unlike co-ops; a purchase here will consist of a deed and the freedom to do what you want with space. Condos can be easily bought, sold, and rented-out by foreign buyers with little to no strings attached. But this flexibility does come at a price. Condos tend to be 30% approx more expensive than co-ops of comparative size. They also tend to come with higher closing costs, something that must be borne in mind when calculating total closing costs. As a foreign buyer, you’ll quickly see that condos are the best option.
If You Need a Loan, You’ll Need a Credit History
If you’re in a hurry to buy now, then an all-cash purchase will eliminate the mortgage process and entice any seller you approach. But if you don’t mind a little waiting, now is a perfect time to take advantage of historically low-interest rates. Even buyers who can afford to pay all-cash have started taking out mortgages in increasing numbers over the past year. Iberia Bank is one of the leading banks for non-citizens in need of a mortgage.
But for a foreign buyer, taking out a mortgage can present a problem. You’ll need a US credit history. The path towards getting this is to apply for social security or tax identification number and get a good credit card. Then start making purchases on that card and pay off your bills every time they come due. After 1-2 years of this, you should have a solid enough credit rating to start the mortgage application process. Of course, this will mean waiting a while if you’ve just arrived in the US for the first time. But if you plan to buy someday in the future, then the sooner you start building your credit, the better.
Understand the Tax Implications
Any major property purchase will have tax implications, and this is doubly so for non-U.S citizens. This is a very important aspect of any deal and needs to be thoroughly understood before proceeding with any purchase. The following are the taxes you need to be aware of:
Mansion Tax
- It is a statewide tax that applies to all homes of $1 million or more. Previously, it was a tax of 1% on any property at or above $1 million. But last year changes were made that now make the tax rate rise incrementally for purchases of $2 million or more. It finally caps out at 3.90% for properties sold for $25 million or more. It must be paid by the buyer within 15 days of closing and applies to all residential properties in New York.
New Development Tax
- An additional state tax applies to new developments. This often gets passed on to buyers and can vary from 0.4% to 1.4% for properties worth more than $500,000.
Recording Tax
- This is a mortgage recording tax that applies to anyone who purchases in NYC with the help of a mortgage. It requires buyers to pay 2.05% on mortgage amounts under $500,000, and 2.175% on amounts above $500,000. Keep in mind that these taxes apply to the mortgage amount, not the purchase price. It’s worth mentioning that mortgage recording taxes don’t apply to co-ops.
Capital Gains Tax
- If you ever decide to sell at a later date, both the federal government and NY state receive a tax from the sale. The cost of this depends on whether you’re selling your primary residence or an investment. For residents who live in NY state, the tax is 15% for the federal government and about 10% for city taxes. But for non-residents, the total tax rate is 30%
FIRPTA
- Under the Foreign Investment in Real Property Act, the US government withholds taxes to ensure that non-residents pay their taxes. NY state withholds 6.85% while the Internal Revenue Service (IRS) withholds an additional 10%. Once the sale is completed, the seller must file a Statement of Withholding on Disposition by Foreign Persons of United States Real Property Interest form with the IRS. The only way to avoid these taxes is if a foreign investor creates a Limited Liability Company (LLC).
Set Up a Limited Liability Company (LLC)
Due to all of these tax implications, it will be in every foreign buyer’s best interest to try and mitigate them as much as possible. The best way to do that is by creating an LLC. This will be something that your buyer’s agent can walk you through and get set up. An LLC is a company formed between a group of people who want to accomplish a specific goal without necessarily tying themselves together permanently. A property purchase is a perfect example of this.
LLC’s come with many protections and benefits that make them very appealing for foreign investors. One of their major advantages is that when the property is sold, the property’s title is transferred to the LLC. This allows you to avoid any taxes on the sale. Other advantages of an LLC include protections against disclosures, which can be a big help in protecting your other assets in case of any legal dispute.
Assemble an A-Team
Any property purchase involves a lot of complexities, and this is more so for foreign buyers. To make sure things go smoothly, you’ll need a good team in place to help you through, every step of the process. This team will include a real estate broker, an accountant, a tax advisor, a real estate attorney, a mortgage broker, and perhaps a contractor if you think you’ll be doing some renovating. If you don’t know where to start, then schedule a meeting with an Elika buyer’s agent today. They can provide you with a list of professionals in the industry that they can vouch for. Also, be able to walk you through the entire buying process and answer any questions you might have. Great things start with small steps, and purchasing a home in NYC is no different.
