Real Estate for the International Investor

There has never been a better time for foreign nationals to consider a real estate purchase here in the United States. Simply stated, the weakening of the US dollar and the softening of the housing market here has made real estate a very attractive investment vehicle. While affordability and buying power due to the strength of foreign currency is a key factor, desirability of property here along the California coast of Santa Barbara ensures that a real property purchase will hold its value and will continue to be a solid investment for years to come. In addition, our secure ownership rights to real estate here may well be among the best in the world due to our system of stable property rights and regulations. Lastly, the purchase process is relatively simple, transparent and uncomplicated.

According to international tax experts, buying and owning US real estate is no more complex than purchasing and owning in your own country, as long as one follows all the income tax rules involved in the country of purchase. The following information outlines the key issues involved in purchasing a single-family home here in California and provides an outline of the purchase process and a typical timeline for a sale.

Holding Title/Grant Deed

It is important to decide ahead of time how to hold the title to the real property one is purchasing. Depending on marital status and individual preference or recommendation from legal counsel, one many choose to have just one spouse hold the title (name on the grant deed) or one may wish both spouses to hold the title. If both spouses are on the grant deed, both must file federal and state taxes.

Please remember that whoever holds title will need to be present to sign the escrow papers upon close of escrow. Alternately, one may assign someone with power of attorney to execute closing documents, provided the power of attorney is notarized at an American consulate overseas.

Taxpayer Identification Number

All foreign investors must obtain an Individual Taxpayer Identification Number from the US Internal Revenue Service. This number must be used on all tax forms and will assure the correct application of withholding taxes.

Regarding Escrow

  1. Escrow is simply the term used to describe the time from when a purchase offer has been accepted by the seller to the time that the buyer closes sale on the property. Here in Santa Barbara, CA, a "normal" escrow is around 30-45 days but may be shorter if desired.

  2. When writing up a purchase contract, one will need proof of funds (bank statement, letter from a banker or investment manager) that covers the buyer's down payment as well as "earnest money" (roughly 3% of the purchase price). Once escrow is opened, one must provide proof of funds for the total purchase price within 1 week.

  3. Upon acceptance of the buyer's offer, the "earnest money" is cashed and deposited into a neutral 3rd party escrow company within 3 business days. If providing a wire transfer or bank check, one must include wiring instructions and/or have provided for transfer of funds in US dollars. Problems with regard to meeting the required deadlines for deposits do arise periodically when funds are being transferred from overseas. Current security measures are holding up many transfers from overseas for up to two weeks or more, so it is a good idea to transfer funds into the US far enough in advance of a potential purchase.

  4. As a buyer, there are two major contingencies which must be lifted prior to full execution of a sale: the loan contingency and the physical inspection contingency. Generally, these last 14-21 days from acceptance of an offer. During this time, one will receive numerous disclosures about the property from the seller as well as other general disclosures. During the due diligence period, the buyer will do a home inspection of the property with a licensed contractor, and then based on the results of this and the seller's written disclosures, one will hire experts to look into any negative issues/concerns about the property, and go over potential requests for repairs. It is important that the buyer be on site for all inspections, along with the realtor, who will make arrangements and recommendations for suppliers to do the inspections and reporting. Ultimately, this is the time to negotiate if needed and make sure that one feels comfortable about the home being purchased. If, during the due diligence period, one cannot reach terms with the seller under the contingency period or one is uncomfortable for any reason about the purchase, escrow can be cancelled and the deposit is returned within 24 hours.

  5. Upon releasing contingencies, loan documents will be signed (if needed), generally within 4-6 days before the close of escrow. If paying all cash, the buyer must make arrangements to transfer all funds for the home purchase to the escrow office within 36-48 hours before the close of escrow date.

  6. Once the funds have been received and the grant deed signed, ownership is transferred to the buyer and escrow is formally closed.

Regarding Costs

A buyer here in California will incur miscellaneous costs for such things as escrow fees, lending fees (if any), home inspection fees and any other due diligence requirements relating to verifying the condition of the home. The total amount of closing costs varies from property to property. There are no fees to work with a Realtor for the purchase of a home. The seller generally pays for commissions to Realtors.

Property Taxes

In California, Proposition 13 has set property taxes as 1.02% of the purchase price of a property. Currently, this is a fixed tax rate which does not change over time. Property taxes can be paid in full once a year or in two installments, due December 10 and April 10.

Taxes and the Role of a Tax Accountant Advisor

There are federal tax consequences relating to the purchase of real estate in the United States as well as state tax requirements, which may vary from state to state. Foreign investors should be aware of both federal and state tax laws in the locations where they are considering a real estate investment. It is advisable to secure the services of an accountant familiar with California tax law as well as federal tax requirements. It is important to note the availability and requirements of tax refunds and state tax laws relating to holding real property as they may differ from federal laws, among other things. An accountant will ensure compliance with all pertinent tax laws, especially when purchasing real property for investment purposes.

Do You Need a Lawyer to Purchase Real Estate?

There is no actual distinctive function or requirement for a lawyer in a real estate transaction. However, one might want the assistance of an attorney for various tasks. A real estate lawyer can review the sales contract for a buyer, check on the title and review a mortgage contract, making the necessary adjustments or corrections. An attorney will also provide advice on all legal and tax issues concerning the purchase. A real estate attorney can also make the necessary adjustments relating to various expenses and costs involved in the purchase. He may assess eligibility for tax refunds and draft the related documents and statements.

Putting it simply, a real estate lawyer will be the buyer's watchdog. An attorney will guide one through the whole process of purchasing real estate in the United States in order to make sure that one is legally protected. He will be a capable and trustworthy liaison to help the buyer with the contract and he will also handle legal disputes, if any arise.

California real estate in Santa Barbara, Montecito and environs will prove to be a smart choice for any foreign buyer, whether he or she is looking for an investment, a second home, vacation property or primary residence.