5 points for Singaporeans investing in U.S. real estate

In the U.S., the popularity of U.S. real estate for foreign buyers continues to grab news headlines. In July, an article in the U.S. edition of the Wall Street Journal noted that foreign purchases of U.S. residential real estate jumped 35% in 2013 with Chinese clients leading the way.

Apparently Chinese customers purchased US$22 billion or 24% of all foreign sales by dollar volume. This is up from US$12.8 billion or 19% during the previous year.

In May 2014, data from the National Association of Realtors in the U.S. showed that Singaporeans ranked 11th in terms of international searches on therealtor.com website. It is noteworthy that there were more searches from Singapore than from mainland China!

Singaporeans were most focused on property located in Houston, LA, Atlanta, Las Vegas, and San Francisco. Atlanta surprised me as it showed a shift away from the traditional West Coast focus.

I was recently in New York and Florida and there appear to be many great opportunities for those looking for an investment property or for a holiday home. Prices are often a fraction of that paid for an equivalent property in Singapore. But before you jump in - here are five points for Singaporeans considering an investment in U.S. real estate.

First, ensure that the professional you liaise with is well qualified and properly licensed. Do not be shy to ask them about their licensing body. Then go away and check with their licensing body to ensure that the professional is still in "good standing".

There is no such thing as too many background checks! Personal references are also very helpful. 

Secondly, in the team you retain to assist you, please keep in mind that you will need two distinct skill sets. You need someone qualified in U.S. real estate and you also need someone qualified in international U.S. tax for non-Americans.

Non-Americans investing in U.S. real estate may assume certain U.S. tax obligations and you are safest with a U.S. qualified professional with experience in the international aspects of U.S. tax compliance.

Depending on how you decide to approach your investment, it may even be helpful if your professional is also familiar with Singaporean entity structures.     

Thirdly, staying on the U.S. tax theme, if you are not careful, the rental income from your real estate investment may be considered FDAP income and/or subject to FATCA withholding.

FDAP stands for Fixed, Determinable, Annual, Periodic income which means that 30% of the rent is automatically withheld as tax. FATCA stands for the Foreign Account Tax Compliance Act and has a similar impact to FDAP in this situation.

Your professional should know these rules and work with you to ensure that you obtain the most favorable tax treatment.

Fourthly, note that gains on sale of U.S. real estate by foreigners may be subject to tax at the same rate as U.S. persons. In addition, a non-U.S. seller may be subject to the Foreign Investment in Real Property Tax Act of 1980 (known commonly as FIRPTA).

Under this law, the buyer may be required to withhold 10% of the price and remit this to the IRS (the U.S.' Inland Revenue Service). This sometimes leads to overtaxing, and your professional should be able to advise you on this potential consequence before you invest. 

Fifthly, your professional needs to help you understand estate and gift taxes. On your death, your U.S.-situated real estate may be subject to 40% U.S. estate tax (on assets in excess of US$60,000).

Also, as a non-U.S. person, you may be subject to gift taxes on gifts of U.S.-situated real estate which may be as high as the estate tax.

In summary, opportunities await. Exercise due care and have some fun as you explore what is a very diverse real estate landscape!