“Manhattan condos are the new Swiss bank accounts.” A couple of years ago, Business Insider published an article discussing the large number of Manhattan residences owned by foreign nationals, and this was one of the key takeaways. But, what exactly is this supposed to mean?
According to a Census Bureau estimate referenced in the article, in certain high-value areas of New York City, as many as 30 percent of residential properties are owned by investors who live abroad. These investors generally either own the properties directly (in their own name) or through a domestic limited liability company (LLC). Establishing a domestic LLC (and, potentially, other entities as well) can have significant tax benefits which can make investing in New York real estate a particularly attractive opportunity for foreign nationals with enough capital to get into the market.
Considering an Investment in New York City Real Estate? Consider an LLC
According to the 2016 Knight Frank Wealth Report, Manhattan is the world’s top real estate market. This ranking is based upon a number of factors, including the local economy and quality of life. While New York real estate is notoriously expensive within the United States, it is actually comparatively affordable when considering home prices in many other major cities around the world.
Of course, when you live overseas and are not a U.S. citizen, you can expect to face certain challenges when seeking to buy property in New York. Forming a domestic LLC can help mitigate many of these challenges.
Benefits of Forming an LLC to Own Real Estate in New York
Benefit #1: Reduce Your Tax Burden
Foreign nationals are subject to a number of taxes and increased tax rates that do not apply to U.S. and New York citizens. These include a New York capital gains tax that applies to non-residents, as well as the federal Foreign Investment in Real Property Tax (FIRPTA) that applies at the time of sale. When you form a domestic LLC, the company is treated as a U.S. citizen and is taxed accordingly.
Benefit #2: Privacy
When you form an LLC in some states in the US, you do not have to publicly identify the company’s owners. Forming a series of overseas entities and establishing offshore accounts can further insulate an LLC’s owner’s identity.
Benefit #3: Limited Liability
Another significant benefit of forming (and properly maintaining) a domestic LLC is that doing so can insulate you from personal liability for certain debts incurred in relation to the property. For example, suppose you only inhabit your New York residence a few months out of the year and you have a pipe burst; or, maybe you rent out the property and a tenant sues you when a stair breaks and they get injured in a fall. If you put the property into an LLC, you may be able to avoid being held personally liable in property damage or personal injury litigation.
Importantly, these and other benefits may be available through various alternative ownership structures as well.
Townhouse, Condominium, or Co-op?
In New York City, you have three primary options when it comes to types of properties: Townhouses, condominiums, and cooperatives (co-ops). As a foreign national, choosing between them involves more than simply considering specific locations and personal preferences.
Important Considerations with Townhouses and Condominiums
Due to the limitations with co-ops discussed below, many foreign nationals seeking to buy in New York City find it preferable to invest their money in townhouses and condominiums. Deciding whether a townhouse or condominium makes the most sense for your personal circumstances requires consideration of a number of different factors. For example:
- Do you prefer the amenities that come with a condominium (and are you willing to pay the monthly association fee, which can easily climb into the thousands of dollars)?
- Do you want flexibility with regard to making updates and renovations? If so, a townhouse may be a better option.
- How much of a concern is security? While condominium buildings (especially high-end condominium buildings) typically offer a number of security features, again, you may have more flexibility for custom installations in a townhouse.
Drawbacks of Co-Ops
While cooperatives make up the majority of New York City’s real estate market and tend to be priced a bit lower than condominiums, they have a number of drawbacks that tend to make them less-favorable options for foreign investors. That said, you should carefully weigh all of your options, as owning a co-op could be a smart alternative based upon your personal preferences and circumstances.
Some of the drawbacks of co-ops for foreign nationals include:
- Buying into a co-op in New York involves an approval process, which can often take months to complete.
- There are financing limitations for co-ops.
- Co-ops are typically subject to strict regulations, which can limit the use of individual residences and severely restrict the ability to undertake renovations. Co-op regulations also frequently limit (or prohibit) subleasing.
- When you sell a co-op, you generally have to pay a “flip tax” to the co-op board.
Additional Considerations for Owning Real Estate in New York City
The following are some additional important considerations for foreigners seeking to purchase real estate in New York City:
If you will finance all or a portion of your purchase, your lender will almost certainly require you to insure the property. However, even if maintaining insurance is not a contractual requirement, it is still a good idea – especially for a foreign investor.
Property insurance policies provide coverage for casualties resulting from certain causes. You will want to make sure that your policy is adequate both in terms of (i) scope of coverage, and (ii) policy limits. It may be worthwhile to consider purchasing additional coverage beyond that which is typically offered. If you will be renting the property, there are other coverages you will want to consider as well.
When purchasing a piece of property in New York, you can expect to pay a variety of different fees. These include bank and origination fees (from your lender), closing fees, transfer fees, title fees, real estate agent fees, and more. There are ways to avoid some of these fees (for example, by paying for the property with cash), but you can typically expect to pay somewhere in the range of five to seven percent of the purchase price in additional fees.
Yes, we’re talking about taxes again. The taxes we mentioned above are by no means the only taxes that apply to foreign real estate investors. Before purchasing real estate in New York, you should be sure to understand – and plan for – the income, property, estate, and other taxes that are assessed at the federal, state, and local levels.
Keep in mind that foreigners who own properties in the US are subject to estate tax when the value of assets exceeds $60,000. Owning a property through a domestic LLC does not avoid US estate tax because LLC shares are considered as US assets. If estate tax is a concern, a foreign owner should consider having non-US structures to own real estate.
4. Legal Considerations
Finally, as with any significant transaction, there are a number of legal considerations involved with buying real estate in New York as well. Among them, (i) you need to make sure that you will acquire a “clean” title to the property, and (ii) you will need to make sure that the purchase contract does not contain any unreasonably unfavorable provisions.
5. Estate Planning Considerations
Even if an owner lives outside of the US, if a property is located in the US, it has to go through a US probate process to be transferred at the death of the owner. The probate is a costly and time-consuming process and your family will have to travel to the US. If you care about your family, it is best to have an estate plan to avoid a probate.
Your estate plan should also include a guidance to manage your properties when you are incapacitated.
Contact Jiah Kim & Associates to Learn More About Buying Real Estate in New York
If you are a foreign national and are considering a real estate investment in New York City, Jiah Kim & Associates can assist you throughout the process. To speak with an attorney in confidence, call (646) 389-5065 or schedule a consultation online today.
This blog post is written for educational and general information purposes only, and does not constitute specific legal advice. You understand that there is no attorney-client relationship between you and the blog publisher. This blog should not be used as a substitute for competent legal advice from a licensed professional attorney in your state.