For the year ending in March 2013, foreign nationals spent $68.2 billion on home sales in the United States, the second highest level in recent years and more than 6 percent of the total existing home sales.1
Despite a bumpy real estate market in the past few years, U.S. real estate still holds a great appeal to international buyers. The U.S. welcomes foreign buyers and offers a combination of benefits that include well-defined property rights, a stable government and the world’s reserve currency.
And, contrary to popular assumption, foreign buyers not only purchase real estate in traditional U.S. gateway cities and states, but also in other states. While Florida, and in particular Miami, is still the biggest beneficiary of international real estate purchases (23 percent), other states are experiencing an increase in attention as well, including Arizona, California, Hawaii, Illinois, Michigan, Nevada, New York, Texas and Virginia.2
But there’s a flip side to the benefits for foreign nationals owning U.S. property—exposure to a potentially hefty estate tax.
Estate Tax Exposure
The intended safe haven of U.S. real estate ownership can quickly become a tax quagmire as a result of U.S. estate tax impacts on non-resident foreign nationals.
Although U.S. citizens and permanent residents are afforded a $5.34 million estate tax exemption (adjusted for inflation), non-resident foreign nationals – those who aren’t U.S. citizens and have their primary residence in another country – are generally limited to a $60,000 estate tax exemption. The value of U.S. residential real estate purchased by foreign buyers will almost always exceed this amount. Further, the top tax rate rose from 35 percent to 40 percent in 2013. Which means, should a non-resident foreign national own a vacation home in the U.S., his heirs could face a tax of up to 40 percent of the fair market value of the vacation home in effect at the time of the owner’s death.
Simple Remedy
A smart way to protect a legacy from possible high U.S. estate tax liability is with a life insurance policy. The U.S. tax code considers life insurance on the life of a non-resident foreign national as not “situated within the United States” and, therefore, not included, as part of their U.S. gross estate. Simply put, the death benefit isn’t subject to U.S. estate tax at the death of the insured and should go to the heirs and/or beneficiaries intact. Purchasing a life insurance policy in the amount of an estimated estate tax liability can help ensure that the heirs and beneficiaries of a non-resident foreign national will have the funds needed to pay any assessed U.S. estate taxes.
In addition, the cost of life insurance issued in the U.S. is very competitive compared with products offered in other countries and, in some cases, can offer great advantages – such as a guaranteed universal life insurance policy—which may not be available in the foreign national’s home country.
Non-resident foreign nationals must understand the U.S. tax treatment of their U.S. property to make smart estate planning decisions. All solicitation and communication (including marketing materials) concerning the sale of life insurance products, including all telephone, fax, or other electronic or delivered correspondence to a foreign national must take place in the United States.
Although care is taken in preparing this material and presenting it accurately, Transamerica disclaims any express or implied warranty as to the accuracy of any material contained herein and any liability with respect to it. This information is current as of February 2014.
Endnotes
- Yun, L., et al. (2013). National Association of REALTORS®, 2013 Profile of International Home Buying Activity. Retrieved from www.realtor.org/reports/profile-of-international-home-buying-activity. “Although international sales decreased from the previous level of $82.5 billion for the year ending March 2012 due to decreased sales and an increased number of transactions at the lower end of the market by foreign buyers, the dollar value was the second highest in recent years.”
- Ibid.