Open some financial accounts overseas and have more than $10,000 in them at any time during the year, and you’ve got to report it to the IRS and U.S. Treasury Department on your annual income tax return. Don’t forget to include the same information in detail on a little horror show called a Form 8938. Same goes for your interest in any foreign investment fund, corporation, LLC, trust or other entity.
Armed with this information, the government money-grabbers will know how much you’ve got and where to go when the time comes to rob you, no matter where your money is around the globe. It won’t matter if it’s in an offshore bank. They’ll probably just say, “You’ve got X in foreign accounts and we can’t touch it directly, so we’ll take more out of your U.S. accounts to compensate.”
But under current rules, personally-owned foreign real estate can be held with no reporting requirement, so the Feds won’t know about it at all.
That’s because foreign real estate isn’t a “specified foreign financial asset” under U.S. tax law. Like gold or gems in a vault in Montreal, artworks in a Swiss duty-free warehouse or stamps in a safe deposit box in Guernsey, foreign land could be your own little — perfectly legal — secret.
Owning foreign real estate, also known as a “dirt bank,” is a way to park your wealth in a place and form that can’t be touched by the government under current U.S. law. And since you don’t have to report it, the taxman can’t use it to calculate your net worth for the purposes of potential wealth confiscation.
Although appreciation in the value of your land holdings is desirable, it’s not the prime consideration. You don’t want to see values fall, of course, but the main goal is to stabilize and protect your wealth in a form that isn’t vulnerable to easy confiscation. As long as the overall value of your investment remains stable, that’s success.
That means you must be prepared to trade some asset value appreciation for greater security. In fact, that’s what many foreign investors are doing — such as Chinese millionaires who buy property in the West as a hedge against the unpredictable policies of their nominally Communist government or Russian oligarchs who buy in London.
How to Dig Up the Best Dirt Bank
These considerations — risk-hedging versus asset protection and wealth generation — help identify the key variables you’ll want to use when searching for investment property abroad. Here’s my list of the main issues any investor looking for asset value stability in land should consider.
- Restrictions on Foreign Ownership: Unrestricted foreign ownership rights means you’re operating in a global market, not just a national one. You can sell to other foreigners as well as locals.
- Market Stability and Liquidity: Obviously, you want to invest in places that will maintain the conditions that prompted you to buy there in the first place. It’s impossible to predict the future, but there are many countries that can boast decades of stability on the issues that matter — property rights, taxation, openness to foreigners and so on. That’s where you want to invest in property. But you also want to be sure that you can liquidate your property holdings when the time comes, so choosing a country with an active property market is important too. The good news is that the two factors — stability and liquidity — tend to go hand-in-hand.
- Property Values: Owning property is analogous to owning a business. You can invest in a big business that makes a good profit or many smaller businesses that collectively earn the same. But the hassle of owning many small businesses may make it a more difficult route to wealth. The same goes for property. Whether to invest a big sum in a single piece of agricultural land or the same in 10 different residential parcels — even in different countries — depends on your desire to be involved in managing your foreign property assets. And some countries’ land values are such that any investment at all would constitute too big a chunk of your portfolio.
- Title Security: Some countries with great upfront property deals also have weak titling and deeds registry systems. This can come back to haunt you if someone comes along with a stack of old paperwork and claims that your land was actually stolen from his grandfather. Even if it isn’t true, it can tie your property up for years.
- Buying Costs: Every country levies some form of tax or duty at the time of a real estate transaction, which are usually shared by buyer and seller. Some can be in the double digits, so it’s important to anticipate this cost so you can balance it against expected land value appreciation and other cost factors.
- Property Tax: Some countries don’t levy any property tax. But most do, and like transaction taxes, these need to be taken into account when working out how much of your wealth you’re going to be preserving, and how much you’re going to be giving to the foreign taxman for the privilege.
- Capital Gains Tax: Capital gains taxes on property sales vary widely, and some countries don’t levy any at all, or tax it as ordinary income. But some — including some of the most popular expat destinations — have capital gains rates in the double digits. You want to know upfront if you’re going to be trading low transaction and property taxes now for a big capital gains hit when you sell, and vice versa. But bear in mind that the IRS is going to tax you on any gains from foreign property sales, so the most important thing is to ensure that the foreign rate is below or equal to U.S. rates, which are 15% to 20% for most households. That way you can deduct the foreign capital gains tax from your U.S. tax obligations and come out even. If you invest in a country with a capital gains rate above the U.S., you will pay more in taxes.
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Editor, The Bauman Letter and Plan B Club
Editor, The Bauman Letter and Plan B Club