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| Buying
Real Estate In Another Country: The Last Great Non-Reportable Investment
Idea? |
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| As we progress
into the 21st Century, one theme that seems to a common one among the so-called
modern industrialized welfare states is a new aggressiveness towards worldwide
taxation of citizens. In the case of the US, it has been the situation
for some time now that the US tax authorities claim the right to tax US
Citizens on worldwide income regardless of where they are living and working. |
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| They even
go so far to claim the right to continue taxing a citizen after that citizen
may have even renounced US citizenship (and procured another in the
process presumably). Death does not give you an escape, as the
US claims the right to tax the estate of US citizens as well. |
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| Europeans
on the other hand have it a bit easier in that they can declare themselves
legally non-resident in their former country (while retaining citizenship)
and opt out of the tax system accordingly. This stems from the idea or
concept that if you NOT living there, then why should you continue to pay
taxes for government services you are not using? This at least is
a fair and reasonable point of view. However, with that said, we
know that the European Union certainly has a Savings Tax Directive designed
to collect interest from bank accounts across borders, that are owned by
EU citizens. |
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| So,
even the EU is somewhat in this line of thinking, although certainly not
as much so as the US. |
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| In any event,
many of these tax collection issues center around investment or banking
accounts owned by citizens in another country. However, it is very
interesting to note that REAL ESTATE ownership is not reported, is not
required to be reported and is a non taxable asset for Americans or Europeans
in terms of any worldwide taxation reporting initiatives (unless you
happen to have rental income and are a US citizen, in which case Uncle
Sam claims the right to pick your pocket, which is another matter for another
day). So, for those people that very concerned about following
the tax reporting regulations to the word, owning an asset such as real
estate in another country may be the answer. In fact, apart from
the idea of moving funds offshore to buy real estate (which is perfectly
legal to do and does not invoke any sort of tax liability to do so),
there are also a number of social, economic and other benefits to consider
as well. |
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| When you discuss
the idea of owning real estate in another country with Americans, many
will claim that this is a risky idea, that legal protections for titles
do not exist, that living in foreign lands may be dangerous, along with
a whole slew of other comments - which are not entirely accurate or true. |
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| In fact, in
many countries, such as the Dominican Republic, title insurance is certainly
available (from well known firms such as Stewart Title) and legal
guarantees under the law for foreign investors as well. In many countries
also, you need not be a resident or citizen at the time you make a real
estate purchase either. |
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| Europeans
of course have no problem investing in real estate overseas and generally
make the leap to ownership abroad much quicker and easier. Regardless,
both Europeans and Americans do have a current problem at home they need
to consider in the decision making process - namely a housing boom or bubble
in their respective countries (which means that NOW may be the best
time to cash out and move your profits). |
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| Calculations
by The Economist suggest that house prices have hit record levels in relation
to incomes in America, Australia, Britain, France, Ireland, the Netherlands,
New Zealand and Spain. In other words, ratios of prices to incomes are
now above levels that have proved unsustainable in the past. Taking the
average ratio of house prices to incomes in 1975-2000 as a baseline, American
house prices are now almost 30% overvalued. |
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| http://www.economist.com/finance/displayStory.cfm?story_id=3477796 |
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| Where as housing
prices have gone up roughly 65 percent in the United Stated from the period
1997-2004 according to the Economist Financial Magazine, the figures are
far more dramatic in the following countries for the same period:
South Africa - 227 percent, Spain - 149 percent, Ireland - 187 percent,
Britain - 139 percent, Australia - 112 percent (see the online article
from the Economist for the full list). |
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| What does
this all mean? Well, for starters it has been noted that artificially
cheap interest rates have been partly to blame. |
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| Even more
so in the US, where housing prices have not gone up as dramatically as
the other countries on the chart, YET the debt incurred to purchase the
properties could lead to a serious problem going forward. In fact,
in some areas of the US, it is estimated that over 50 percent of new home
financing is interest only and or hybrid adjustable rate mortgages, whereby
buyers are not even paying off the debt principal as part of the payment
plan (in the case of interest only and so-called 1 percent ARM option
loans). In addition, some newer statistics would indicate that
about 70 percent of all residential real estate is mortgaged, in one form
or another. |
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| In other words,
about
30 percent or so of US homeowners actually own their own home outright
with no debt or mortgage against the property, while 70 percent of US residential
property has a debt liability. But aside from that, home prices as
a percentage of average income is at one of its highest levels or ratios
historically, making housing even more expensive or less affordable for
many middle class people. |
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| European
housing prices are even worse or have gone up even more shockingly over
the past five years, yet there may be a major difference in terms of the
consumer debt supporting it (in comparison to the US market).
However outrageous home prices are still outrageous regardless, and a boom
is also a bust waiting to happen. |
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| One possible
indicator that a boom is becoming overblown is speculation. Roughly
20 percent (or more) of property purchases in the US right now (2005) are
done for speculative reasons rather than personal shelter (personal shelter
meaning you are buying a home you intend to live in yourself). |
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| Your initial
reaction to this might be - so what? But what if the boom started
to subside? What if US interest rates started going up? What
if many US consumers are in over their heads now (just about making
the payments) AND things turn negative? This may all sound like
a dooms day scenario, but keeping your fingers crossed does not mean deflation
or a turn down economically is impossible. Germany already is starting
to see a slight pull back in terms of housing prices and the domestic housing
market. Is it that Europe follows the US in terms of economic cycles,
is it the other way around - or not at all? It can be difficult to
predict, but one thing is certain - real estate in many other countries
is still less expensive and not over leveraged with debt. Why
is this so? |
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| http://money.cnn.com/2004/11/11/real_estate/investment_prop/pf_worldhousing/ |
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| Sounds terrible,
does it not? But it is true in many countries that local banks require
a 50 percent down payment or will only offer a mortgage for 15 or 10 years
only. |
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| But is this
really such a bad idea? We know that according to some US statistics,
roughly 70 percent do NOT own their own home. Which is to say, people
that have purchased homes think that they own it, but they really do not.
The bank does, and in effect these people are tenants making monthly payments
to the bank. Where as in the past, this was a fairly sound idea -
many people today are making interest only payments. In effect, remaining
on the hook for the full debt amount while making monthly payments to the
bank for interest only. In any event, from a socio-economic point
of view, certainly a case of citizens living on credit (in terms of their
own home) and certainly very much so exposed financially should things
become difficult economically going forward. Contrast this now to
a country where most of the citizens own homes outright (paid in full
with no mortgage) or whereby the requirements are steep in that a loan
applicant must be very solvent in order to qualify. What are possible
differences in financial outcomes for people living in the easy credit
environment (no money down, etc.) versus the later more difficult one?
One thing that comes to my mind, in terms of the easy credit environment,
is that many people are going to loose their homes and face severe problems
(which
often enough translate into social problems). In the country
where most people pay cash for their homes, they may loose their job, the
economy may turn negative - but they still have their own home (free and
clear). Ergo, even with a poor economy, certainly the probability
of LESS social strife and not more, in the country with the high down payment
or cash only real estate purchase environment. Where have we seen
real case studies of this? Where have we seen a country where
the people actual do own their own property, and often have more real personal
wealth that have allowed them to weather economic torments? Argentina
is one and the Dominican Republic yet another. |
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| This is in
contrast to accepted wisdom in North America, whereby everyone can borrow
money and buy a home - but without the savings to do it with. No
money at risk often means no personal responsibility, or at least the probability
of walking away if things go wrong (and certainly not a pretty site
for the banks that have loaned the money either). |
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| In any event,
let us put our long-term rational thinking caps on for a moment.
If the US and Europe has experienced explosive double-digit gains in the
housing markets (a boom, if you will), is it perhaps time for some profit
taking? If you do believe that there is a debt and leverage problem
affiliated with the housing market in these places as well, then where
will this lead socially and economically? The final question is,
depending of course how you answered the first two questions - Where do
you go? |
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| The surprising
answer for some might be - those very countries where credit is strict
and housing equity in the hands of the owners and not the bankers.
For many people, the equity in their current home is the bulk of their
wealth or savings. So, it stands to reason, the opportunity exists
to tap into that wealth and buy a home, apartment or small farm in Argentina,
Brazil, Dominican Republic, Ecuador and a host of other places where the
climate is good year round, real estate prices are not overblown AND whereby
perhaps the opportunity exists to draw a tax-free income from the left
over funds. So, we started our discussion with the idea that buying
real estate abroad may be one of the few legal non-reportable wealth transfer
opportunities left (for Americans especially). However, the benefits
extend far beyond just that. |
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| SOME ADDITIONAL
INFORMATION: |
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| Comments from
Mr. Graham Hacche, Deputy Director of the External Relations Department
at the IMF, September 29, 2004. |
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| The United
States, which led the way out of the recession, recently hit a soft patch.
With failing fiscal stimulus and higher oil prices weighing on consumption,
much will depend on continued employment growth. Nevertheless, this is
a soft patch, not a sinkhole. The measured pace of withdrawal of monetary
accommodation should continue. On the fiscal side, however, despite recent
revenue buoyancy, we see red ink stretching into the future. |
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| Latin America
is doing a lot that is right, and it has a period of growth, and it should
use the period of growth to strengthen some of those reforms. |
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| http://www.imf.org/external/np/tr/2004/tr040929.htm
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| OTHER RELATED
REAL ESTATE ARTICLES: |
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| http://bigpicture.typepad.com/comments/2005/05/interest_only_l.html
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| http://bigpicture.typepad.com/comments/2005/05/as_prices_rise_.html
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| U.S. NATIONAL
DEBT CLOCK (Read it and weep) |
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| http://www.brillig.com/debt_clock
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