Crye-Leike

Fred Yancy

Photo of Fred Yancy

Associate Broker

fred.yancy@crye-leike.com

Featured Listings

 

MORTGAGE LOANS  FOR NON-US CITIZENS

 

We receive requests from people interested in buying a home in the United  States who are not US citizens. The status of a person in the United States  makes different loan programs available depending on the length of stay that the  person is allowed to stay in the country.

We will try to describe these options from least difficult to most  difficult.

PERMANENT RESIDENT ALIENS

These people are able to apply for a loan in exactly the same conditions as  any US citizen. Loans to these customers are purchased automatically by Fannie  Mae and Freddie Mac. The person must show us the ?green card? issued to him by  the Immigration and Naturalization Service (INS). Sometimes the bank will ask  for an authorization to contact the Social Security Administration ( SSA) to  confirm the social security administration. These borrowers have access to all  loan programs, first mortgages, second mortgages, home equity lines of credit  and mortgage insurance. Borrowers must have a valid social security number.

H1B VISA HOLDERS

H1B visas are issued to international workers who come to the United States  for a definite period of time. Usually between three and six years. Normally  banks treat these applicants as permanent residents, in some cases they will ask  to see a petition to extend the residency permit. Interest rates and conditions  will be similar to those offered to US citizens. The SSA will have provided  these applicants with social security numbers.

 

WORK PERMIT

Known as the Employment Authorization Document ( EAD) the work permit is  given to students, fiancées of US citizens, foreign diplomats, special workers.  Fewer banks are willing to provide a mortgage to these persons due to the short  term they are allowed to stay in the country. Other banks state that they are  only concerned that the person is in the US legally and will provide a mortgage  under normal conditions.

FOREIGN NATIONALS

It has become very difficult to obtain mortgage financing for foreign  nationals in the last year. Fannie Mae and Freddie Mac have removed those  options from their offerings. Most national mortgage lenders that provided  foreign national mortgages no longer offer them. Several banks in Florida still  offer loans to foreign nationals who are buying property in that state. The  borrower usually has to put 25% as down payment and provide proof of employment  and credit in his native country. They must provide a tourist visa that allows  them to visit the US and the home they buy in the US will be considered a second  (vacation) home for them. It is unfortunate that this kind of financing is so  restricted at this moment. Investments by foreigners at this time of a glut in  the housing market and a weak dollar would open up many options to sell homes.

 

ITIN MORTGAGES

For many years the Internal Revenue Service ( IRS) has provided non US  citizens with Individual Tax Identification Numbers (ITIN). These numbers are  used by the IRS to track (and be able to tax) income from dividends, savings,  commissions and other income generated in the US. The ITIN does not allow the  person to live or even be in the United States, it is only a medium for tax  control. Some companies however are using the ITIN to identify their customers  in credit transactions and thus reporting them to the credit bureaus. A limited  number of national banks offer mortgages to ITIN holders. Some banks will use  the ITIN number when assigning customers checking, savings accounts and CDs.  Some local and regional banks offer mortgage loans to customers with ITINs.  These customers provide a history of employment, sometimes alternative credit  documents ( utilities, insurance bills, retail accounts, cellular phone bills)  and bank statements to qualify for a mortgage loan. At one time loans for these  customers only required 3% down payment, now most programs require between 10%  and 15% down payment.

Provided by CNC Mortgage

 

Foreign Persons Receiving Rental Income From U.S. Real  Property
 

U.S. real estate professionals and rental agents/property managers are  encountering an increasing number of situations that involve foreign persons'  acquiring U.S. real estate as a part-time residence, for investment or in some  cases to conduct a U.S. business. The U.S. tax rules that apply to ownership and  dispositions of U.S. real estate by foreign persons are different in some  important respects from the rules that apply to U.S. persons.

U.S. real estate professionals must know how to properly deal with foreign  investors in U.S. real estate in order to be in compliance with the federal tax  laws affecting real estate transactions. They must be familiar with the rules  that determine whether an individual or entity is to be treated as a U.S. person  or a foreign person. In addition, they must also be familiar with the  fundamentals of U.S. federal income taxation of foreign investors with U.S.  rental income. Under U.S. tax law, a taxpayer can depreciate the property.  There are different depreciation rates for residential and commercial  properties. This annual depreciation is deducted from income as an expense on an  income tax return. However, it may be recaptured if the property is sold.

Foreign Property Owner?s Tax Return Responsibility During Ownership and  Rental of Real Property Interest

Before agreeing to manage U.S. real property for a foreign taxpayer, a real  estate professional or rental agent should discuss with the foreign client  whether the rental income will be taxed as investment income through  withholding, or on a net income basis as ?effectively connected with a U.S. trade or  business,? without withholding (although the owner may have to file  estimated tax returns). Rental income from real property located in the United  States and the gain from its sale will always be U.S. source income subject to  tax in the United States regardless of the foreign investor's personal tax  status and regardless of whether the United States has an income treaty with the  foreign investor's home country.

The method by which rental income will be taxed depends on whether or not the  foreign person who owns the property is considered "engaged in a U.S. trade or  business." Ownership of real property is not considered a U.S. trade or  business if it consists of merely passive activity such as a net lease in which  the lessee pays rent, as well as all taxes, operating expenses, repairs, and  interest in principal on existing mortgages and insurance in connection with the  property. Such passive rental income is subject to a flat 30 percent withholding  tax (unless reduced by an applicable income tax treaty) applied to the gross income rather  than the "net rent" received. Thus, the real estate taxes, operating expenses,  ground rent, repairs, interest and principal on any existing mortgages, and  insurance premiums paid by the lessee on behalf of the foreign owner-lessor,  must be included in gross income subject to the 30 percent withholding tax. The  gross income and withheld taxes must be reported on Form 1042-S,  Foreign Persons U.S. Source Income Subject to Withholding (PDF) to the IRS  and the payee by March 15 of the following calendar year. The payor must also  submit Form 1042,  Annual Withholding Tax Return for U.S. Source Income of Foreign Persons  (PDF), by March 15.

If, on the other hand, the foreign investor is engaged in a U.S. trade or  business such as the developing, managing and operating a major shopping center,  the rental income will not be subject to withholding and will be taxed at  ordinary progressive rates. Expenses such as mortgage interest, real property  taxes, maintenance, repairs and depreciation (accelerated cost recovery) may  then be deducted in determining net taxable income. The nonresident must make  estimated tax payments for the tax due on the net rental income, if any. The  only way these expenses can be deducted, however, is if an income tax return  Form 1040NR for nonresident alien individuals and Form 1120-F for foreign  corporations is timely filed by the foreign investor.

Foreign individuals and foreign corporations may elect to have their passive  rental income taxed as if it were effectively connected with the U.S. trade or  business. Once such an election is made by attaching a declaration to a timely  filed income tax return, there is no obligation to withhold even in a net-lease  situation. Once made, the election may not be revoked without the consent of the  IRS. Unless the foreign investor has properly informed the property manager  that the rental income is to be treated as "effectively connected income" by  submitting to the property manager with a fully completed Internal Revenue  Service Forms  W-8ECI, Certificate of Foreign Person?s Claim for Exemption From Withholding on  Income Effectively Connected With the Conduct of a Trade or Business in the  United States (PDF), the property manager should withhold thirty percent (30  percent) of the gross rental receipts so as to avoid personal liability. A fully  completed Form W-8ECI must include a valid U.S. tax identification number for  the foreign landlord (in other words, the rental agent must withhold and remit  the 30 percent tax to the IRS until this requirement is satisfied). A real  property manager who collects rent on behalf of a foreign owner of real property  is considered a withholding agent and is personally and primarily liable for any  tax that must be withheld. The liability of the withholding agent includes  amounts that should have been paid plus interest, penalties, and where  applicable, criminal sanctions. Property managers who do not comply with these  rules will be held liable (either individually or through their company) for 30  percent of gross rents, plus penalties and interest. Also, property managers  need to report annual rents collected on behalf of foreign landlords on Forms  1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons,  and 1042-S, Foreign Person?s U.S. Source Income Subject to Withholding. These  are the equivalent of Forms 1096 and 1099-MISC but are for foreign owners.

To enforce the system of withholding, the Internal Revenue Code defines a  "withholding agent" to be any person in whatever capacity (including lessees and  managers of U.S. real property) having the control, receipt, custody, disposal  or payment of income that is subject to withholding. Thus, a real property  manager who collects rent on behalf of a foreign owner of real property is  clearly considered a withholding agent. A withholding agent is personally and  primarily liable for any tax that must be withheld. The liability of the  withholding agent includes amounts that should have been paid plus interest,  penalties and, where applicable, criminal sanctions. The statute of limitations  does not start until a withholding return is filed by the withholding agent.  Once the return has been filed, the statute of limitations begins to run at the  later of two dates: the date of actual filing of the correct return or April 15  of the calendar year in which the return should have been filed. The withholding  agent will remain liable if he actually knows that the foreign owner's  statements are false. The withholding agent's duty of inquiry seems to be a  "reasonably prudent test," measured by all facts and circumstances.

A nonresident who fails to submit a timely filed income tax return loses the  ability to claim deductions against the rental income, causing the gross rents  to be subject to the 30 percent tax. Generally, the nonresident will need to  retroactively file at least six years of delinquent income tax returns, or all  prior year tax returns, if they have held the rental property for less than six  years. However, the ability to elect to treat the rental income as effectively  connected with a U.S. trade or business will be lost after 16 months from the  original due date of the return, and the remaining back years may be subject to  tax under the gross income method. Rental income from real property located in  the United States and the gain from its sale will always be U.S. source income  subject to tax in the United States regardless of the foreign investor's status  and regardless of whether the United States has an income treaty with the  foreign investor's home country.


Provided by Internal Revenue Service