There are very few restrictions on foreign nationals buying property in the USA and, practically speaking, they will not affect your purchase. Whilst the buying process is largely uniform throughout the USA, taxes and requirements can vary from state to state so it is worth seeking the advice of an attorney with local expertise if possible. In any case, the services of an attorney will be necessary as there are a number of mandatory duties that only they can perform during the transaction.
Once you have found the property you wish to purchase, you will need to make a formal offer and an agreement of sale will be drafted by the seller’s attorney. This commits the buyer to the sale but only under the provision that certain conditions are fulfilled (i.e. that the title deed is in order). The agreement of sale will also outline dates for completion which are binding. During this period, the seller’s attorney will obtain and review all relevant documents such as; the deed, survey, title search and title insurance policy, mortgages on the property, etc. These can then be reviewed and negotiated by your attorney and the final conditions for the agreement of sale can be agreed. During this time you will need to have a Home Inspection Survey carried out to check for structural soundness, termite infestation, and radon. In the USA, you will also be required to take out a title insurance policy which varies from state to state but should cost around 0.5% of the sale price.
The next stage in the process is for the vendor and the buyer (or their representatives) to attend the title company where the buyer will need to present a certified cheque for the balance of the sale price, proof of insurance, and proof of payment for insurance. Upon signing the Agreement of Sale it is usual for you to pay a deposit of 10% of the purchase price. This payment will be held in escrow by the seller’s attorney until the transaction has been closed. It is important to be aware that until both parties have signed the contract and it is delivered, the seller can still entertain and accept other offers.
The fees payable upon closing the sale will vary according to local jurisdiction but will typically involve; a fee to record the deed and the mortgage (Recording Fee) of between 0.5% and 1%, legal fees of around 05%-1%, inspection fees, and Transfer Tax which varies from 0.01% in Colorado to as much as 2% in Delaware.
Non-residents are liable to pay taxes on their income from U.S. sources and the tax liability depends on the type of income earned. Income is taxed at the federal, state, and municipal levels, although some states and municipalities such as Florida do not levy taxes on income.
There are four filing categories for taxpayers, namely; single, head of household, married filing jointly, married filing separately. Unmarried non-residents, however, are not allowed to file as heads of household. Similarly, married non-residents are also not allowed to file jointly with a non-resident spouse. Rental income for non-residents is taxed at the federal and, usually, the state levels. At the federal level, non-residents may opt to have their rental income classified as Fixed Determinable Annual Periodical (FDAP) income or as Effectively Connected Income (ECI).
Under the FDAP classification, rental income is subject to a 30% withholding tax, levied on the gross amount, without offset for deductions, personal allowances or credits. If the taxpayer chooses to have rental income classified as ECI, the ordinary progressive tax rates are imposed after allowable deductions have been applied. These federal tax rates are as follows:
2007 INCOME TAX RATES: Heads of Households
TAXABLE INCOME, US$ MARGINAL TAX RATE
Up to US$ 11,200 10%
US$ 11,201 – US$ 42,650 15% on band over US$ 11,200
US$ 42,651 - US$ 110,100 25% on band over US$ 42,650
US$ 110,101 - US$ 178,350 28% on band over US$ 110,100
US$ 178,351 - US$ 349,700 33% on band over US$ 178,350
Over US$ 349,700 35% on all income over US$ 349,700
2007 INCOME TAX RATES: Single Individuals
TAXABLE INCOME, US$ MARGINAL TAX RATE
Up to US$ 7,825 10%
US$ 7,826 - US$ 31,850 15% on band over US$ 7,825
US$ 31,851 - US$ 77,100 15% on band over US$ 7,825
US$ 77,101 - US$ 160,850 28% on band over US$ 77,100
US$ 160,851 - US$ 349,700 33% on band over US$ 160,850
Over US$ 349,700 35% on all income over US$ 349,700
2007 INCOME TAX RATES: Married Individuals (filing separately)
TAXABLE INCOME, US$ MARGINAL TAX RATE
Up to US$ 7,825 10%
US$ 7,826 - US$ 31,850 15% on band over US$ 7,825
US$ 31,851 - US$ 64,250 25% on band over US$ 31,850
US$ 64,251 - US$ 97,925 28% on band over US$ 97,925
US$ 97,926 - US$ 174,850 33% on band over US$ 174,850
Over US$ 174,850 35% on all income over US$ 174,850
When a non-resident alien sells a property, the buyer is required to withhold 10% of the selling amount as tax. The withholding tax is later credited as advance payment for capital gains tax.
Income from the sale of property is always considered as ‘effectively connected income’ (ECI). For properties disposed of on or after 6th May 2003 until 31st December 2010, the tax rate on net gains will be 15%. The tax rate would be reduced to a minimum of 0% for individuals belonging to the 10% and 15% tax brackets for capital assets disposed of after 31st December 2007. However, the rates will revert to the old 20% and 10% on 1st January 2011 during which the reduced rates for capital gains expire unless Congress extends the law to make it permanent (although this is highly probable).
In the USA, real estate property is not taxed at a federal level and taxes are levied by local municipalities and counties within the states. Real Estate Tax will vary from state to state but the tax levied by New York provides a fairly standard example. The tax is levied on the assessed value of the property and the assessment begins with the classification of property into one of the four classes.
Class I includes most residential property of up to three units (such as one, two, and three-family homes and small stores or offices with one or two apartments attached), vacant land zoned for residential use, and most condominium buildings not more than three stories.
Class II consists of all other property that is primarily residential such as cooperatives and condominiums.
Class III includes property with equipment owned by a gas, telephone or electric company.
Class IV includes all commercial and industrial property such as office or factory buildings.
Once the property’s class is determined, the appropriate multiplier, called the assessment ratio, for its class is applied to its market value. For Class I properties, the assessment ratio is 6%. For Classes II, III and IV, the assessment ratio is 45%. The end result of this calculation will be the assessment value on which the tax will be imposed and this will vary for each class as below:
CATEGORY TAX RATE
Class I 11.928%
Class II 11.928%
Class III 11.577%
Class IV 10.059%
The Unites States of America is the oldest, and perhaps most publicly scrutinised, federation in the world. It is a constitutional republic whereby the President of the United States is head of state, head of government, and of a two-party legislative and electoral system. The government is regulated by the United States Constitution, which serves as the country's supreme legal document and as a social contract for the people of the United States. In the American federalist system, citizens are usually subject to three levels of government; federal, state, and local - the local government's duties are commonly split between county and municipal governments. The federal government is composed of three branches: Legislative (the Senate and the House of Representatives), Executive (The President), and the Judiciary (The Supreme Court and lower federal courts).
The most notable differences, perhaps, between the political system of the United States and that of most other developed democracies are the power of the Senate as the upper house of the legislature, the wide scope of power of the Supreme Court, the separation of powers between the legislature and the executive government, and the dominance of the two main parties - the United States being the only developed democracy without a major third party.
The US Dollar has been adopted by a number of other countries as the official and legal currency and is the currency most used in international transactions. The US has the highest level of output in the world, with its GDP valued at US$13.2 in 2006. Although serious economic imbalances have emerged in recent years, including an overvalued housing market (currently in the process of correction), a low propensity to save, and an unprecedented current-account deficit - the US dollar remains a strong currency and will undergo a recovery in the coming years.
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