Rules of Real Estate For Foreign Buyers

Think, live and invest globally.

International investing is an exciting opportunity for those who consider the benefits of

living internationally and gaining from the appreciation and returns of real estate. There are

typically two reasons an international investor would find Hawaii appealing: quality of life and

return on investment.


Quality of Life

There are few places in the world where you can live work and pay in paradise while

enjoying the benefits of being in the US. Hawaii is one of those places. The average temperature

in Hawaii ranges from 70 to 85 degrees with 3,041 hours of sunshine each year. Air and water

quality are also good with access to many organic foods and farm raised meat and dairy products.

Education is usually an attractive part of being in the US and with the variety of public

and private schools to choose from Hawaii bodes well as a destination for education. An investor

may purchase a residential property near a preferred school to save money on boarding costs.

Health care and medical services are another reason why some consider a residence in

Hawaii. Hawaii residents enjoy some of the longest life expectancies of citizens in the US and

Hawaii as a state ranks toward the top of the list for health care system performance.

Return On Investment

The average appreciation rates for Hawaii are higher than the national average due to the

limited supply of properties relative to demand. On average Oahu residential real estate has an

annual appreciation rate of 5-6%. This is over the span of the last 40 years. Relative to property

prices however, rental rates are slightly lower than other parts of the US, which results in a lower

net rental income for the investor. Generally speaking, a cap rate of 4-6% is acceptable to

Tax Considerations

The tax code is likely to differ between different countries and it is important to know

when you are required to pay taxes as an investor in real property. The two times that you may

be required to pay taxes are when you sell a property for a gain or generate rental income. For

this reason it is important to obtain an Individual Tax Identification Number (ITIN) or Employer

Identification Number (EIN) if you are not eligible for a Social Security Number (SSN).

Individual foreign investors may obtain an ITIN to engage in buying and selling of US real estate.

Foreign corporations who are registered in the State of Hawaii can use their EIN for business

transactions. Permanent aliens residents with work visas can use their SSN for real estate

Selling A Property

As mentioned in chapter three, when you sell real estate for a gain you may be subject to

capital gains tax. Holding the property for less than 1 year would involve short-term capital

gains tax rates which are typically higher than long-term capital gains tax rates. There are both

federal and a state capital gains tax that you should be aware of. Consulting a tax professional is

the best means of determining the specifics of your taxable event.

Rental Income

When you benefit from rental income you may be subject to income tax both at the

federal and state level. Additionally, there are state taxes such as a general excise tax (GET) and

transient accommodation tax (TAT), which may apply. The GET applies to the gross income

derived from any business in Hawaii and is payable by the business owner and not the purchaser.

The TAT only applies if you are a visitor to Hawaii and are staying for less than 180 consecutive

days. Guests and transient tenants at hotels, motels, condominiums and apartments are required

to pay this tax. Landlords who house tenants that do not intend to make Hawaii a permanent

home and have leases of less than 180 days are obligated to collect this tax from their tenant and

then send this to the State Tax Collector.

Forming A Separate Entity

As a foreign buyer of US real estate there are benefits to purchasing property via a

foreign corporation or US corporation, which may provide a combination of anonymity, legal

protections and tax differences. However, each structure has its own set of complications that are

best understood by consulting with a CPA and attorney. Here is a summary of several differences

Direct Individual Ownership

-Preferable capital gains tax rates.

– Subject to US gift and estate tax.

– FIRPTA withholding shall apply when property is sold.

Foreign Corporation

– Limited liability for shareholders.

– Avoidance of US gift and estate tax.

– Subject to branch profits tax and ordinary income tax.

– FIRPTA withholding shall apply when property is sold.

US Corporation

– Limited liability for shareholders.

– Subject to US estate tax and ordinary income tax rates.

– FIRPTA withholding may be avoided when property is sold.

Financing For Foreign Investors

There is financing available for foreign nationals in Hawaii real estate with many of the

same requirements that apply to residents in the US. There will be a verification of employment,

income, cash reserves and credit references. Also, there may be a requirement to open up a local

bank account along with a need for proper identification at the time of loan application signing

with a passport and/or US visa. If there is increased risk for the bank, a larger down payment

may be required, with possibly a higher interest rate.

For the cash requirement of a purchase, it is customary to provide a verification of cash

funds when submitting an offer to purchase real property. This being the case, having evidence

of cash funds available in a US bank may be requested within a certain number of days after a

contract is agreed upon. Factoring in the exchange rate as well as the time needed to transfer

funds into a US bank is a crucial part of following the timeframes of the purchase contract.

A Foreign Investing Team

Though purchasing real estate is a straight-forward process it is necessary to have a team

of professionals able to assist you in the different aspects of international investing. Having the

right real estate agent is a crucial component. This agent should be knowledgeable not just about

the market and process of buying or selling real estate, but he should also be able to guide you to

other professionals who can advise you both with tax and legal advice. A certified public

accountant (CPA) will enable you to determine the best ownership structure to optimize the tax-

benefits of real estate. He will also guide you to understand the required taxes to pay. An

attorney who understands real estate ownership by foreign nationals will advise you on how to

take title to the property and will protect your legal interests. It may also be necessary to have a

relationship with an immigration attorney who understands visas and ways a family can benefit

from real estate ownership. A loan officer and escrow officer who speak the native language of

the investor can more easily explain technical terms pertinent to financing or title. Lastly, having

an interpreter available is always a good person to involve so that costly misunderstandings can

be avoided. These are the kinds of professionals that you want on your team so that your

purchase of Hawaii real estate will be an enjoyable experience.

About the Author

Brandon Lau grew up in Kailua and currently resides in Honolulu with his wife Andee and children Caylah, Elijah, and David. His eighteen years in real estate led him to become a Partner at ChaneyBrooks Choice Advisors. Over the past 10 years he has developed the team and systems that has created a high level of service and value for his clients.

What differentiates Brandon and his team is his consultative approach to real estate. He advises clients with relevant data and expert insight to help them make the best choices in real estate. Good choices in planning for long term dispositions, negotiating for the best price or knowing when not to pursue an investment are ways his consultative services will give you an advantage in the marketplace. His bottom line is providing service with the utmost integrity and expertise.