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The Aspen real estate market over the years has experienced a lot of interest from foreign buyers. Besides being a popular ski resort known worldwide, Aspen has rewarded real estate investors with above average investment returns. Being located within the United States also adds to its popularity among foreign property investors.
The United States is the most popular place in the world for foreigners to invest as reported by The Association of Foreign Investors in Real Estate (AFIRE). Fifty-one percent of AFIRE members chose the U.S. as the best opportunity for real estate capital appreciation. England raked number two with 30 percent followed by number three China with 10 percent. The U.S. was also ranked number one as being the most stable and secure of the world’s real estate markets. Historically, Aspen has experienced an average appreciation in real estate values close to 15 percent since the mid-70s, making it one of the top real estate markets in the U.S. in terms of appreciation.
Despite the attraction of investing in U.S. real estate, foreign investors face a number of hurdles. Besides dealing with a legal system they may not be familiar with foreign investors may face difficulty in obtaining financing. Roughly 34 percent of potential foreign purchasers are unable to complete transactions due to problems in obtaining financing. Under the new financing guidelines, common issues for foreigners are the lack of a Social Security number and being able to produce U.S. tax returns, along with the difficulty in verifying foreign income and assets.
Another issue that foreign buyers need to deal with is the treatment of foreigners under the U.S. tax laws. Foreign corporations and individuals are faced with vastly different U.S. tax rules on their real estate investments than U.S. Citizens. It starts with the questions of who is a foreign buyer or seller under the U.S. tax code? The answer is determined by whether a foreigner is defined as a U.S. resident for tax purposes. This depends on the number of days that person is present in the U.S. over a three-year period. To qualify as a tax resident, a foreign person must be present in the U.S. for 183 days, or more, spending at least a certain part of the 183 days each year in each of three consecutive years.
Once the basic question of tax residence is determined, the next question is whether the foreigner should take title to a property as an individual, a domestic corporation or limited liability company, a foreign corporation or a foreign trust. If an investment property is held in the name of a foreign entity, the tax is generally applied to the gross income from the property; whereas, if the property is held in the name of a domestic entity, the tax is applied to the net income after expenses are deducted. As a result, the foreign entity could end up paying substantially more in taxes compared to a domestic entity. Upon the sale of the property, the foreign entity must withhold a tax equal to 35 percent of the gain recognized, while a domestic entity would only need to withhold tax equal to 10 percent of the gain distributed to a foreign interest holder.
The treatment of gifts of real property interests by foreigners, and estate transfer of property interests upon an owner’s death, can vary widely under the U.S. gift and estate tax laws depending upon how the ownership is structured. From financing to legal liability and tax treatment, these are complex legal and tax questions that require foreign investors to seek the guidance of attorneys and tax specialists that are experienced in foreign property ownership in the U.S.