Are you interested in purchasing real estate in the US?
If you plan on buying a property with the intention of renting it out or even using it as a US holiday home throughout the year, there are a number of factors that you should take into consideration before you make any major decisions.
There are countless advantages to choosing a property in the US, including various locations to pick from. Also, a large tourism industry means renting your real estate in the US is easy, and owning a house there can help you receive residency status.
If you don’t know much about the town or city where your desired property is located, it’s best to start by flying there and visiting it as a tourist. That’s how you can combine pleasure with the important experience you need as a buyer.
This may seem obvious, but investors regularly make poor investment decisions because they believe the location in which their property is located is similar to another town they are familiar with.
You can also evaluate if the town centre is acceptable, if public transportation is accessible, if there is decent shopping, and if there are any other elements that are important to your possible renter or buyer.
With that in mind, we have put together this handy guide on what you need to know before you buy to rent in the USA if you are an investor from another country, and also what kind of US tourist visa you need to get there.
Before you make any rash decisions and purchase real estate in the US, we recommend you do some market research, so you can locate the best property for you.
The following is a list of key factors that you should take into consideration before buying a property in the US:
There have been major changes in the real estate market over the last year.
If you want to buy to rent in the USA in the coming year, here are the top ten best places to buy vacation rental property in the USA:
According to fortunebuilders.com, the best cities to buy a rental property in the USA are:
If you are considering buying rental property in the US, we recommend that you familiarize yourself with the factors that can impact the rental property’s performance. Some of them are the location, the vacancies and listings, and future development in the area.
There are numerous factors that influence a location’s rental viability. Some of the major ones that make a city or market ideal for owning rental real estate are:
The cost of the rental real estate determines a large part of an investor’s potential return and the likelihood of maintaining rents in relation to the area’s median income.
The median rental rate should support the median home price. The greater the rental yield, the higher the median rental rate in relation to the housing cost. The rental yield is calculated as a percentage of the rental income compared to the market value of the property.
Investors want to buy a rental property in an area where rental units are in high demand. A lot of factors influence demand, including the unemployment rate, population growth, job opportunities, overall demand for rental units in the market today, and rental-rate growth.
Aside from rental income, owning rental real estate has a number of advantages, including tax breaks and the potential for asset appreciation. When determining the best market, the rate of appreciation was taken into account.
The local economy will be an important factor in determining the viability of a particular rental property.
Areas with future development projects are usually indicative of a healthy market. You’ll need to contact the local municipal planning department to learn about all of the new projects that are currently underway or in the future.
We understand that buying a property in a foreign country can be a difficult decision. especially if you are making it from your home country, without visiting the real estate first.
With that in mind, it would be best if you could take some time to travel to the United States and explore the areas you are interested in before making such an investment.
It would be a great opportunity for you to explore the local area, the standard of living, and most importantly – whether or not there is a healthy rental market.
However, make sure you apply for your US travel visa when planning your trip.
American visa processing takes time just like another visa type.
This is why it’s always a good idea to wait for your visa to be issued before booking your flight.
If you plan on travelling to the United States to view potential properties you can apply for an ESTA. However, ESTA is not considered a visa.
ESTA stands for ‘electronic system for travel authorization’ and is a mandatory digital travel authorization for the United States that allows you to travel there without a US tourist visa.
The following is a list of the eligibility requirements for an ESTA:
Your USA ESTA will be valid for two years from the moment it’s granted. You are entitled to visit the US an unlimited amount of times during this period.
Each stay is limited to 90 days and in order to stay more than three months, you will need to obtain an American visa before your trip.
Check out our detailed ESTA USA application guide that explains everything you need to know about the travel permit.
The easiest way to apply for an ESTA is online with Visa First. With over 17 years of experience, Visa First stands at the forefront of the visa service industry worldwide. The process is much faster and a lot easier than the US visa application.
Before buying or renting out real estate in the US, you must consider if you want to manage your US holiday property yourself or hire a property manager.
If you don’t live nearby, it can be extremely difficult, if not impossible, to manage a vacation rental yourself.
There is so much that needs to be considered in person and there must be someone who will take care of the maintenance issues. Like, for example, if the property is cleaned between renters.
However, hiring a property manager is costly. The industry standard property management fee for long-term rental properties is 10% of the rental income.
In the case of vacation rentals, the standard fee is 25–30% of the rent. That is a substantial sum of money.
Why is managing a vacation rental so expensive? Because it takes a lot of time. The manager must constantly advertise the property, coordinate regular cleanings and maintenance, and deal with vacationers’ issues.
Many business owners believe it is well worth the investment. Furthermore, if your manager can market the property more effectively than you can, the increase in occupancy and average rates that results can help offset the fee.
The next thing you need to consider is that in addition to the mortgage, you will be responsible for property taxes, insurance, utilities, and other expenses at two homes.
Many financial planners advise against purchasing a vacation home – or any real estate – unless you intend to keep it for at least five years.
The US tax year runs from January to December each year. Foreigners owning a rental property in the United States are required to pay certain property taxes including capital gains, rental income taxes, and local property taxes.
A non-resident’s income in the US is divided into two separate categories:
Income, which is effectively connected, is taxed at a graduated rate with certain deductions allowed. On the other hand, income that is not effectively connected is taxed at a flat rate of 30%.
The general rule of thumb is that a non-resident who rents out their US property is subject to a 30% withholding tax which is charged on the gross amount of each rental payment.
In the majority of cases, the tenant or the real estate management company (only if there is one involved) is responsible for withholding the 30% tax before handing the net amount over to the non-resident landlord.
Overseas landlords can mitigate the 30% gross income withholding tax by making an election under IRC section 871(d) to treat all income from that property as income effectively connected with a trade or business in the United States.
This rule relieves the income payor from the obligation to withhold 30% tax on gross income.
It also allows non-residents to file an annual tax return and tax the rental income on a net basis.
This is done by attaching a formal election statement to a tax return form 1040NR.
In the United States, property taxes vary from state to state. Because of this, it is important you establish the rates in the specific area you are interested in purchasing a property before you commit.
Broadly speaking, real estate taxes are imposed on the value of the property, meaning US property taxes tend to be higher in places with higher housing prices.
The majority of states with the lowest real-estate rates are located in the south or west while the states with the highest tax rates are situated in the northeast.
The rental property tax rates in the US charged to non-residents vary greatly depending on the municipality.
In some areas of the country, you’ll pay only a few hundred dollars per year, whereas, in others, your tax bill will be in the thousands (or even tens of thousands, depending on the value of your home).
You are charged a percentage of your assessed home value each year. The exact rate is determined by your jurisdiction, including how much is required for local schools, government operations, utilities, and other purposes.
Here are the rates for residents. The rates for non-residents are similar.
You can contact Property Tax International and their tax experts can file your tax return and answer your US property tax questions.
| STATE | Median Property Taxes | Effective Property Tax Rate |
|---|---|---|
| U.S. | $2,149 | 1.05% |
| Alabama | $543 | 0.37% |
| Alaska | $2,956 | 1.02% |
| Arizona | $1,356 | 0.64% |
| Arkansas | $693 | 0.63% |
| California | $3,104 | 0.70% |
| Colorado | $1,489 | 0.53% |
| Connecticut | $5,327 | 1.68% |
| Delaware | $1,243 | 0.58% |
| Florida | $1,686 | 0.89% |
| Georgia | $1,397 | 0.88% |
| Hawaii | $1,406 | 0.30% |
| Idaho | $1,246 | 0.72% |
| Illinois | $3,995 | 1.95% |
| Indiana | $1,085 | 0.82% |
| Iowa | $1,916 | 1.46% |
| Kansas | $1,849 | 1.28% |
| Kentucky | $1,042 | 0.79% |
| Louisiana | $707 | 0.51% |
| Maine | $2,259 | 1.24% |
| Maryland | $3,142 | 1.00% |
| Massachusetts | $3,989 | 1.10% |
| Michigan | $2,174 | 1.37% |
| Minnesota | $2,200 | 1.06% |
| Mississippi | $813 | 0.62% |
| Missouri | $1,387 | 0.97% |
| Montana | $1,652 | 0.73% |
| Nebraska | $2,467 | 1.61% |
| Nevada | $1,481 | 0.60% |
| New Hampshire | $5,100 | 1.94% |
| New Jersey | $7,410 | 2.13% |
| New Mexico | $1,188 | 0.62% |
| New York | $4,600 | 1.32% |
| North Carolina | $1,322 | 0.81% |
| North Dakota | $1,722 | 0.90% |
| Ohio | $2,032 | 1.54% |
| Oklahoma | $1,036 | 0.87% |
| Oregon | $2,563 | 0.91% |
| Pennsylvania | $2,553 | 1.46% |
| Rhode Island | $3,884 | 1.43% |
| South Carolina | $798 | 0.52% |
| South Dakota | $1,879 | 1.18% |
| Tennessee | $1,062 | 0.68% |
| Texas | $2,578 | 1.62% |
| Utah | $1,472 | 0.58% |
| Vermont | $3,795 | 1.79% |
| Virginia | $1,948 | 0.84% |
| Washington | $2,805 | 0.85% |
| West Virginia | $607 | 0.54% |
| Wisconsin | $3,248 | 1.63% |
| Wyoming | $1,196 | 0.58% |
What you might not know is that you can save a lot of money on your tax bill if you understand your tax requirements and entitlements.
The following are a couple of tips to help you reduce your property taxes.
There are a variety of ways you may be able to reduce your property tax liability. For example, you can:
The tax experts at PTI can assist you with all of the above.
It’s tough enough to come to terms with the tax system in your own country, let alone understanding the tax rules and regulations in the US as well.
If you decide to purchase a holiday home in the US, it’s vital you have a good grasp of your tax obligations and entitlements.
To ensure you stay fully tax compliant with the IRS, non-resident US property owners need to file an annual federal tax return.
In order to file, non-residents will need to obtain a US Taxpayer Identification Number (TIN).
It’s important to note that the deadline to file is generally 15 June every year.
If you are wondering what Europeans need to know about tax if they own a property in the USA, check out PTI’s detailed blog post.
Property Tax International provides a complete international tax service tailored towards anyone who plans on purchasing or already owns a buy-to-let property in another country.
Filing your overseas rental property taxes in the US can be a difficult and daunting task especially if you are not familiar with the US tax system but, not to worry, PTI’s affordable and convenient service is all you need.
With over 25 years of experience, PTI’s team of US tax specialists will be your point of contact throughout the tax return process and will communicate with the IRS on your behalf. They will ensure you stay tax compliant both at home and in the US where your rental property is located, which will help minimize your tax bill.
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