By Melanie A. Capobianco,
Belkin, Burden, Wenig & Goldman LLP
The combination of our current depressed economy, a low dollar exchange rate, and a high inventory of available real estate, makes investment in New York City co-op and condo apartments particularly attractive now to foreign investors.
A prudent foreign purchaser must consider various factors in evaluating whether a particular apartment would be a good investment, typically discovered during the due diligence process prior to entering into a contract to purchase an apartment.
Beyond the due diligence process, there are unique considerations related to investing in real estate in the U.S. (and New York City in particular) that should be given considerable weight by a foreign investor when evaluating whether to proceed with such a purchase.
One cost that often surprises foreign purchasers is the New York State “Mansion Tax”, equal to 1% of the purchase price for a residential property costing $1 million or more. In addition, if the seller is a sponsor, a buyer may also often be required to pay the sponsor’s New York City real property transfer tax (1.425% of the purchase price if more than $500,000 and 1% if less than that) and New York State real estate transfer tax (0.4% of the purchase price).
Beyond the initial closing, foreign purchasers should also be aware of two other items that can result in future costs or a decrease in profit margins upon resale–increase in real estate taxes upon expiration of tax abatement programs, and income tax withholding upon resale.
Some newly-built apartment buildings in New York City benefit from real estate tax abatement programs. Although a great incentive at initial purchase, a foreign buyer must keep in mind that this relief is temporary.
One example is the 421-a tax abatement program. Under this program, the building (if a co-op) or individual units (if a condo) will typically enjoy relief from full property taxes for a limited period, normally 10-20 years depending on the building’s location. However, full taxes are typically phased in ratably every two years, thus increasing an apartment owner’s real estate tax liability concomitantly. (In addition to these pre-set tax increases, property taxes are also subject to further increase based on hikes in the property’s assessed valuation. ) Foreign buyers must be made aware of this potential “double whammy”, which could significantly impact the property’s attractiveness to future buyers upon resale.
A foreign buyer should be cautious about tax information obtained from promotional materials or brokers, and must consult with experienced counsel about the nature of any tax abatement programs.
The second potential risk that foreign buyers should be aware of is tax withholding upon resale.
The sale of U.S. real property by a foreigner is subject to withholding under the Foreign Investment in Real Property Tax Act (“FIRPTA”). Under FIRPTA, if the seller is a foreign person, 10% of the sale price must be paid to the IRS at the time of the resale closing. This withholding impacts the amount of funds available at closing and decreases potential profits from a resale of the foreigner’s initial investment.
Foreign purchasers should consult with a tax attorney and accountant regarding these and other U.S. tax implications related to the sale and ownership of real property in the U.S.
If you are a foreign investor seeking to take advantage of this buyer’s market, please feel free to contact BBWG for assistance, and we would be happy to advise you.
Melanie A. Capobianco (mcapobianco@bbwg.com) is an associate in the Firm’s Transactional Department.
About Belkin, Burden, Wenig & Goldman LLP
Belkin Burden Wenig & Goldman, LLP (BBWG) is a full-service firm providing legal services relating to all areas of real estate law including landlord tenant disputes, mortgage foreclosures, leases, co-op and condo disputes, real estate transactions and financing, land use and zoning, real estate administrative proceedings and bankruptcy and creditors’ rights. BBWG serves clients in New York and Connecticut, including New York City, Long Island, Stamford, Westport, Milford, Greenwich, Hartford, Bridgeport, Orange County, New York County, Kings County, Nassau County, and Suffolk County. For more information on BBWG, visit their website at www.bbwg.com.
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