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Real Estate Regains Popularity as Investment Hedge

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Monday, 10 Jan 2011 08:28 AM Current | Bio | Archive

The United States is still the most stable investment environment in the world. While other commodities, like gold, have been highlighted in the press, clearly real estate is historically the single most-important commodity upon which long-term wealth has been maintained.

The United States has undergone quite an upset in its property markets. These are being sorted out in fits and starts. With investors being able to factor that into their investment decisions, U.S real property investment is again becoming a desirable for foreigners as well as Americans.

A recent survey conducted by the Association of Foreign Investors in Real Estate found that “more than 60 percent of the respondents consider the United States to offer the best opportunities for capital appreciation.”

The survey showed that more than 70 percent indicated that they plan to increase their investments in the U.S. commercial markets in 2011. In my view, the big fund players may still look at the gateway cities but real opportunities lie in the secondary cities that will gain from increased recovery quicker, lower taxes, and more recent infrastructure.

For non U.S. investors, there are a number of tax complexities that can be minimized or, in some cases, even avoided if the investment is properly planned. As tax is a real cost, proper planning can make the difference between a successful investment and a loser.

The United States has a special tax regime applying to foreign investors. Referred to as FIRPTA (The Foreign Investment in Real Property Tax Act), it is a classic example of what happens when Congress lets bad policy and political rhetoric become actually legislation. It hasn’t gone away for the past 30 years, and foreign investors will still need to deal with it.

Basically, while Congress still encourages foreigners to invest in U.S. stocks and bonds, and bank accounts for that matter, it generally doesn’t do the same for real estate. The tax law treats U.S. real property interests, other than as a creditor, as taxable.

For creditors, there is an exception for what is known as “portfolio debt.” This was allowed since Congress understood that the United States needs to encourage capital investment. The best way to get foreigners to invest is to say they can make loans, subject to specific qualifications of course, but they will be able to receive interest free of withholding tax.

There are certain other exceptions to the FIRPTA rules. For small residential properties, those below $300,000 it is also possible to avoid withholding tax. Also, there are elections that can be made so that a foreign investor can elect to be taxed domestically.

Tax is a serious business in the United States and the sale of U.S. property by foreign persons creates tax obligations for both the buyer and the seller. As a result, the mechanics of real estate purchases and sales have a level of complexity which some investors may find irritating, to say the least, and will be somewhat time-consuming.

Every country would like to encourage foreign investment. Investors also remain positive about the prospects of the economies in the United Kingdom, Germany, China, and Brazil. Emerging markets such as India and Vietnam also have the eye of potential international property investors.

However, as the new U.S. Congress gets serious about dealing with the problems of the United States budget and overspending, the fear of double-dip recession is fading. How effective Congress and the administration will be is certainly a major factor on everyone's mind.

Investors, without question, will be selective and critical. They have a lot of choices to make as to where they put their money.

Basically, of all the countries in the world, the United States has the most reliable political stability, the world’s largest economy, and continued immigration (legal and illegal) helps grow its economic base.

As a consequence, in spite of some fierce competition for investment dollars, the United States is regaining its stature as the foremost popular jurisdiction for foreign real-estate investors.

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Kleinfeld
The United States is still the most stable investment environment in the world. While other commodities, like gold, have been highlighted in the press, clearly real estate is historically the single most-important commodity upon which long-term wealth has been maintained....
denis,kleinfeld,US,Real Estate,Popularity,Investment,Hedge
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2011-28-10
Monday, 10 Jan 2011 08:28 AM
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