Today, we have something special… A guest investor talks about some of the concerns of buying overseas.
I’ll warn you upfront, what you’re about to read are the uncensored views of a very experienced real estate investor who’s made and lost fortunes while living abroad in a variety of places. As you’ll see, he’s not shy about telling like it really is, and when you look at what he’s saying, you’re guaranteed to find numerous points that you’ll want to consider as you make your moves into international investing.
We share these viewpoints here, since we’ve already addressed all these issues in our single area of investment, Medellin, Colombia. As you’ll see, trying to figure out the best way to take title to a piece of real estate you’re buying overseas can get complicated.
These endless headaches can be avoided when you team up with experts who stick to doing one thing, very well.
The following excerpt comes from a conversation I had with a very eccentric millionaire who now spends all his time trying to figure out how to protect himself. While some of his points are valid, I suspect by the time you read this, you’ll probably agree with me on at least one point: he’s missing the pleasure that we believe should be central to our finite lives. After all, what’s the point of having investments when you can’t enjoy them?
Take two guys, one invested only in stocks, and the other only in real estate. The former has his piles of stock ownership… while we have our beautiful villas and skyrise apartments with stunning views. We can choose to live in ours, or rent them out while away.
And the stock certificates, well you can’t do much with those.
A word of warning, this post is more designed to heighten your awareness and prevent you from falling into one of the most dangerous PITFALLS of real estate investing overseas.
Make it to the end, and we’ll give you a reward worth having. Without further delay, here’s the story:
First, you have to remember probate. Every country has it. Take title to a piece of property in your own name, and your heirs will become well versed in the particulars and complications of probate in whichever country that piece of property lies.
So, while titling real estate in your personal name can be the simplest thing in most cases, it’s generally not the best solution long term. Even if you don’t care about probate (after all, you’ll be dead… your heirs can figure it out), there are other reasons to use an entity to hold foreign real estate assets.
In some cases, it can be the only option.
Croatia was a good example of this a decade ago, before this country joined the EU. Back then (which is when I invested here), Croatia imposed a restriction on the foreign purchase of real estate… a form of reciprocity. For you to be able to buy property in Croatia, Croatians had to be specifically allowed to buy property in your home country.
This created a real challenge for Americans, because, in the case of an American buyer, Croatia wanted to see a letter indicating that Croatians could buy property not only in the United States but specifically in the state the would-be buyer called home. Good luck with that. The workaround was to use a Croatian corporation to take title to your Croatian property.
However, holding Croatian property in a Croatian corporation is a disadvantage, as, if you’ve owned a piece of property in this country for three years or longer, you’re exempt from capital gains tax when you sell it… as long as the property has been held in your own name. Hold the property in a corporation and you’ll be charged capital gains taxes no matter how long you’ve owned it before selling.
Another reason to use an entity to hold a piece of real estate overseas is liability. Putting the property in a single-use entity can limit your exposure should a tenant slip in the shower, say, and crack his skull open.
This makes it harder for a claimant in another country to attach the property to any settlement.
Whatever your goal—being able to actually take title, minimizing probate, or limiting liability—you have to weigh it against the costs, both direct and, especially, tax, of various entity options.
Structuring a purchase properly can reduce or even eliminate your associated tax burden. Using the wrong entity can do the opposite.
I’m in the process now of closing on the purchase of a piece of property in Portugal. My go-to structure for holding foreign property is an LLC. In this case, that won’t work. Well, it will work.
I could use a Nevis LLC to take title to this apartment, but doing so would create tax penalties in Portugal—specifically, at a minimum, higher transfer and property taxes. This is because Nevis is on Portugal’s long black list of countries and jurisdictions it identifies as “tax havens.”
My Portugal attorney and I have considered the following better options. I could:
Put the property in my own name…
Use an entity from a country not on Portugal’s black list…
Use a Portugal entity.
I see putting the property in my own name as the failure option. It’d mean my kids would have to go through probate in Portugal. As I said, I’ll be dead… and therefore not around to help them. I’d like to save them the trouble, time, and cost of the whole experience if I can. This is why I title property in my name only when no other option is available or when the alternatives all create such additional tax burdens that I just can’t stomach it.
Forming an entity in a country not on Portugal’s black list could mean creating tax obligations in that country, as the list includes most (though not all) countries that take a jurisdictional approach to taxation. One country that taxes on a jurisdictional basis and that isn’t on Portugal’s black list is Nicaragua. I considered this option but set it aside for a practical reason. I don’t have an attorney in Nicaragua I’m comfortable working with right now. The time and effort required to carry out the due diligence to understand any possible complications, implications, or consequences of placing this piece of property in Portugal in a corporation in Nicaragua are more than I want to deal with right now on my own (that is, without an attorney I trust to help).
I could use an entity based in a tax-friendly jurisdiction in the United States, such as Nevada. However, that would defeat one of the reasons for investing offshore in the first place. A frivolous lawsuit in the United States (where frivolous lawsuits are an industry) could create a claim against any U.S. assets, including the entity in Nevada that owns the property in Portugal.
Good luck, Mr. Frivolous Lawsuit Complainant, getting the keys to the property. However, on paper, it’d be a risk. Using a U.S. entity to hold foreign assets is almost never a good idea.
That leaves a Portugal entity. Using a Portuguese corporation reduces the initial income tax consequences for a nonresident but probably not enough to offset the cost of forming and maintaining the structure. The amount of the investment is relatively small. In addition, putting the property in a Portugal corporation doesn’t eliminate probate in Portugal.
However, the Portuguese entity could be owned by my existing Nevis holding structure. That would eliminate the probate concern.
Again, deciding on how to take title to a piece of property overseas can get complicated. You can be tempted to tell your attorney to put the property in your own name because that’s the easiest thing to do. Maybe, you might tell yourself, you’ll make a change down the road when you have more time to figure out the best holding structure.
(…and on it goes.)
Did you make it through this rant?
Just imagine what this guy’s life would be like, if, instead of being monomaniacally focused on his money and the legalities of his investments, he was focused on enjoying another day in his chosen paradise.
Suppose he had put all those irrational fears and questions to bed, and went on a date (he is, sadly, single).
We can only shake our heads, because we know this guy does all this to “save a few bucks” on lawyers and real estate experts—exceptionally sad, since he can easily afford these services.
Which type are you?
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