Cost of Ownership
Expenses. For apartments the expenses are:
(i) Property taxes
(ii) Common charges
(iv) If financing, mortgage payment to principal and interest
Financing. Mortgage loan financing is available and can be obtained either through a U.S. or non-U.S. bank. Lenders will require about 50% as down payment from a foreign buyer, this will allow the buyer to leverage his/funds, thereby increasing returns. For example, if a foreign investor purchases one condo at USD $2 million in cash, he gets the appreciation benefit of only one apartment. However if the same investor obtains mortgage financing and only puts 50% down payment, he/she can actually purchase two apartments, effectively benefiting from the appreciation of two properties with the same (theoretical) equity investment.
The two ways of arranging financing are: (i) financing from U.S. lender: This option is easily arranged through a bank in the U.S. The requirement is usually a 50 percent down payment (50% Loan-to-Value Ratio). The purchaser will also need to show liquid assets that are usually based on a multiple of the monthly payments. As an ancillary note, since financing is in the U.S., the purchaser would have to pay about 2% mortgage tax; and, (ii) financing from purchaser’s home country: This refers to getting an international mortgage from the home country of the investor. Hence from the U.S.'s perspective, a cash transaction. The main difference is saving on the mortgage tax and various bank fees. But of course, there may be other fees associated with the financing bank.
Purchase Transaction Costs. For the purchaser, transaction costs are about 5-6% percent of the loan amount. This estimate includes mansion tax, mortgage tax, title insurance, attorney fees, recording taxes and other administrative expenses. With an all-cash closing, the transaction costs are about 1.5% to 2% percent of property price. The broker's commission is paid by the seller, from the seller's proceeds. For the seller, transaction costs are about 8% of the selling price and this is driven by the broker commission and transfer taxes.
Taxes. You must consult with a professional accountant for the specifics. The categories of taxes are:
(i) Property taxes are a monthly expense with each property and paid quarterly. If there is a mortgage, the bank will collect these monies and will escrow the tax amount. This means collecting and paying on behalf of the owner. For properties without a tax abatement, this tax is roughly 1.5% percent of property value, per year.
(ii) Capital Gains Tax will depend on how ownership is held.
(iii) Annual Operating Tax refers to annual taxes on profits from rental income property. The U.S. government allows depreciation of property every year. In Manhattan, 50% percent down payment is typically required for rental income to offset carrying costs including financing. Hence, assuming breakeven cash flow, the depreciation allowance would create a negative taxable income. This means no operating taxes for the owner. However, depreciation would have to be recap tured at time of sale.
(iv) Estate tax. The largest tax exposure to a foreign property owner (compared to a U.S. owner) is the estate tax. U.S. law is such that if a foreign owner passes, estate taxes could be as high as 50 percent. The good news is that there are tax structures that can be set up to remove this risk with the help of a legal professional.
We have tax attorneys and accountants in our network that are qualified to advise our clients on all the above tax matters.