Copyright 2013 John T. Reed
Today’s (6/25/13) International Man email is pushing owning foreign real estate. I don’t get that. The reasons given in the article do not make sense to me.
First off, the advice to protect yourself from future USD hyperinflation is to get your money out of USD-denominated assets and into hard assets and selected foreign currencies (hard assets are generally illiquid and you need liquidity to buy food, gasoline, pay bills, etc.).
U.S. real estate is a hard asset. Why buy foreign real estate if you can buy equally “hard” real estate here, especially when buying real estate in foreign countries is extremely weird procedurally and legally compared to buying U.S. real estate?
International Man speaks vaguely of the U.S. government possibly confiscating your real estate, which they say the U.S. government cannot do if you own foreign real estate.
First, taking your property without just compensation violates the Fifth Amendment.
Second, any creditor, including the U.S. government, can have your property auctioned off to pay unpaid judgments against you. Whether such debts can be used to auction off your foreign property depends on details and treaties between the U.S. and the country in question.
It is harder to do if you own foreign property, but there is no blanket protection against enforcement of court judgments internationally. Indeed, International Man uses a weasel word. They say owning foreign real estate puts part of your net worth outside of the “immediate” reach of your home government. That acknowledges that the only benefit might be a delay. That’s an awful lot of trouble for a mere delay.
They also say owning real estate in another country can make it easier to get a residency permit or citizenship. Sometimes in some countries, but my general impression is that countries are moving away from that option. Friends of mine are now seeking a permanent residency in NZ. They did buy a house there, but it counts for nothing with regard to their permit application. Canada gives no credit for buying a home there with regard to residence permits or citizenship.
A better question is how can you conclude it’s a good idea to buy a home in a foreign country BEFORE they agree to let you live there? Suppose they reject your application?
They say it is diversification. Well, so is U.S. real estate compared to stocks, bonds, and precious metals, which is what IM refers to in that sentence.
Whenever you think about diversification, you need to state exactly what risk is eliminated or reduced by buying the asset in question, and what new risks you become exposed to in the new country. The only risk International Man seems to identify in this regard is confiscation, without compensation, of your property by the U.S. government. That only happens for unpaid judgments and some law-enforcement forfeiture actions in the U.S. In most other countries, especially in Latin America, Africa, and Asia, they have an extensive history of confiscating property, especially that of foreigners, for all sorts of goofy reasons.
Finally they say it gives you financial privacy. That is, you do not have to report foreign real estate owned in your name on the FBAR or 8938 forms. True, but also true of foreign currency. But in the same paragraph they note you can deduct the cost of finding an acquiring the property if it is a rental or business property. Well, in that case, you will be telling the IRS about it, on Schedule E or Schedule C, won’t you?
I am a real estate investment expert. My first full-length book was Aggressive Tax Avoidance for Real Estate Investors, now in its 19th edition. I also wrote How to Do a Delayed Exchange.
To do a tax-free exchange—a huge tax benefit—the properties must be “like kind.” Foreign real estate is by legal definition, not “like kind” to U.S. real estate. That means you may not exchange tax free out of a U.S. property into a foreign one. Although you can do a tax-free exchange of one foreign property for another. Tax-free exchanges only apply to business or investment property, not property for personal use like a principal residence or vacation home. Also, many foreign countries greatly limit your ability to rent real estate as a landlord or to start a business. So switching from U.S. to foreign real estate could trigger a huge tax bill that would not be triggered if you stayed in U.S. property.
And the bigger question is, what, exactly, is the benefit of such financial privacy? There seems to be some vague unquestioned notion that financial privacy is an unalloyed great thing. How so? As far as I can tell, it is just kook paranoia.
And as I have said in other posts and articles, if you act like you are hiding something, all who observe this will assume that you must have something to hide, including not only law enforcement but also creditors, prospective creditors, prospective business associates, prospective spouses, friends, relatives. Financial privacy obsessions are not risk free or cost free. But they do seem to be totally free of actual, real-world, substantive benefits.
Finally, it does not appear to me that one can write about non-U.S. real estate ownership generically. There are about 200 countries and probably close to that many sets of customs, laws, and biases with regard to foreign acquisition, ownership, and use of real estate. I wrote an article for my newsletter Real Estate Investor’s Monthly once about Americans living in Mexico because it was cheaper there. The laws regarding ownership of Mexican real estate by foreigners were comical. In many cases, you could only own it via a trust—which must be reported on FBAR and Form 8938. They also prohibited foreigners owning extremely desirable real estate like ocean front or view properties.
Purchase of foreign (non-U.S.) real estate must considered one country at a time. Few statements can be made about it that would apply to more than a few countries.
John T. Reed