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So Much More Than You Imagined...
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. Real Estate in The Dominican Republic: One of the Last Great Non-Reportable Wealth Transfer and Investment Ideas?
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As we progress into the 21st
Century, one theme that seems to a common one among the so-called
modern industrialized welfare states is a new aggressiveness towards
worldwide taxation of citizens. In the case of the US, it has
been the situation for some time now that the US tax authorities claim
the right to tax US Citizens on worldwide income regardless of where
they are living and working. They even go so far to claim the
right to continue taxing a citizen after that citizen may have even
renounced US citizenship (and procured another in the process
presumably). Death does not give you an escape, as the US claims
the right to tax the estate of US citizens as well. Europeans on
the other hand have it a bit easier in that they can declare themselves
legally non-resident in their former country (while retaining
citizenship) and opt out of the tax system accordingly. This
stems from the idea or concept that if you NOT living there, then why
should you continue to pay taxes for government services you are not
using? This at least is a fair and reasonable point of
view. However, with that said, we know that the European Union
certainly has a Savings Tax Directive designed to collect interest from
bank accounts across borders, that are owned by EU citizens. So,
even the EU is somewhat in this line of thinking, although certainly
not as much so as the US.
. In any event, many of these tax collection issues center around investment or banking accounts owned by citizens in another country. However, it is very interesting to note that REAL ESTATE ownership is not reported, is not required to be reported and is a non taxable asset for Americans or Europeans in terms of any worldwide taxation reporting initiatives (unless you happen to have rental income and are a US citizen, in which case Uncle Sam claims the right to pick your pocket, which is another matter for another day). So, for those people that very concerned about following the tax reporting regulations to the word, owning an asset such as real estate in another country may be the answer. In fact, apart from the idea of moving funds offshore to buy real estate (which is perfectly legal to do and does not invoke any sort of tax liability to do so), there are also a number of social, economic and other benefits to consider as well. . Continued Below.......
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| When you
discuss the idea of owning real estate in another country with
Americans, many will claim that this is a risky idea, that legal
protections for titles do not exist, that living in foreign lands may
be dangerous, along with a whole slew of other comments - which are not
entirely accurate or true. In fact, in many countries, such as
the Dominican Republic, title insurance is certainly available (from
well known firms such as Stewart Title) and legal guarantees under the
law for foreign investors as well. In many countries also, you
need not be a resident or citizen at the time you make a real estate
purchase either. . Europeans of course have no problem investing in real estate overseas and generally make the leap to ownership abroad much quicker and easier. Regardless, both Europeans and Americans do have a current problem at home they need to consider in the decision making process - namely a housing boom or bubble in their respective countries (which means that NOW may be the best time to cash out and move your profits). . Calculations by The Economist suggest that house prices have hit record levels in relation to incomes in America, Australia, Britain, France, Ireland, the Netherlands, New Zealand and Spain. In other words, ratios of prices to incomes are now above levels that have proved unsustainable in the past. Taking the average ratio of house prices to incomes in 1975-2000 as a baseline, American house prices are now almost 30% overvalued. . http://www.economist.com/finance/displayStory.cfm?story_id=3477796 . Where as housing prices have gone up roughly 65 percent in the United Stated from the period 1997-2004 according to the Economist Financial Magazine, the figures are far more dramatic in the following countries for the same period: South Africa - 227 percent, Spain - 149 percent, Ireland - 187 percent, Britain - 139 percent, Australia - 112 percent (see the online article from the Economist for the full list). . What does this all mean? Well, for starters it has been noted that artificially cheap interest rates have been partly to blame. Even more so in the US, where housing prices have not gone up as dramatically as the other countries on the chart, YET the debt incurred to purchase the properties could lead to a serious problem going forward. In fact, in some areas of the US, it is estimated that over 50 percent of new home financing is interest only and or hybrid adjustable rate mortgages, whereby buyers are not even paying off the debt principal as part of the payment plan (in the case of interest only and so-called 1 percent ARM option loans). In addition, some newer statistics would indicate that about 70 percent of all residential real estate is mortgaged, in one form or another. In other words, about 30 percent or so of US homeowners actually own their own home outright with no debt or mortgage against the property, while 70 percent of US residential property has a debt liability. But aside from that, home prices as a percentage of average income is at one of its highest levels or ratios historically, making housing even more expensive or less affordable for many middle class people. European housing prices are even worse or have gone up even more shockingly over the past five years, yet there may be a major difference in terms of the consumer debt supporting it (in comparison to the US market). However outrageous home prices are still outrageous regardless, and a boom is also a bust waiting to happen. One possible indicator that a boom is becoming overblown is speculation. Roughly 20 percent (or more) of property purchases in the US right now (2005) are done for speculative reasons rather than personal shelter (personal shelter meaning you are buying a home you intend to live in yourself). . Your initial reaction to this might be - so what? But what if the boom started to subside? What if US interest rates started going up? What if many US consumers are in over their heads now (just about making the payments) AND things turn negative? This may all sound like a dooms day scenario, but keeping your fingers crossed does not mean deflation or a turn down economically is impossible. Germany already is starting to see a slight pull back in terms of housing prices and the domestic housing market. Is it that Europe follows the US in terms of economic cycles, is it the other way around - or not at all? It can be difficult to predict, but one thing is certain - real estate in many other countries is still less expensive and not over leveraged with debt. Why is this so? . Financing is available in most other countries, but it often doesn't make any sense, said Elizabeth Makatura, vice president for international service and operations for Coldwell Banker. Interest rates can be as high as 30 to 50 percent in some parts of Latin America or the Caribbean. Down payment requirements are also more stringent. While it's not uncommon to put down as little as 0 percent to 5 percent in the United States, in many other countries buyers need a hefty amount of cash to qualify for a loan. According to Fannie Mae, buyers in Italy may need to put down 50 percent of the cost of the house. In Germany, a 40 percent down payment may be needed, and in Mexico a 30 percent down payment is the standard. . http://money.cnn.com/2004/11/11/real_estate/investment_prop/pf_worldhousing/ . Sounds terrible, does it not? But it is true in many countries that local banks require a 50 percent down payment or will only offer a mortgage for 15 or 10 years only. But is this really such a bad idea? We know that according to some US statistics, roughly 70 percent do NOT own their own home. Which is to say, people that have purchased homes think that they own it, but they really do not. The bank does, and in effect these people are tenants making monthly payments to the bank. Where as in the past, this was a fairly sound idea - many people today are making interest only payments. In effect, remaining on the hook for the full debt amount while making monthly payments to the bank for interest only. In any event, from a socio-economic point of view, certainly a case of citizens living on credit (in terms of their own home) and certainly very much so exposed financially should things become difficult economically going forward. Contrast this now to a country where most of the citizens own homes outright (paid in full with no mortgage) or whereby the requirements are steep in that a loan applicant must be very solvent in order to qualify. What are possible differences in financial outcomes for people living in the easy credit environment (no money down, etc.) versus the later more difficult one? One thing that comes to my mind, in terms of the easy credit environment, is that many people are going to loose their homes and face severe problems (which often enough translate into social problems). In the country where most people pay cash for their homes, they may loose their job, the economy may turn negative - but they still have their own home (free and clear). Ergo, even with a poor economy, certainly the probability of LESS social strife and not more, in the country with the high down payment or cash only real estate purchase environment. Where have we seen real case studies of this? Where have we seen a country where the people actual do own their own property, and often have more real personal wealth that have allowed them to weather economic torments? Argentina is one and the Dominican Republic yet another. . This is in contrast to accepted wisdom in North America, whereby everyone can borrow money and buy a home - but without the savings to do it with. No money at risk often means no personal responsibility, or at least the probability of walking away if things go wrong (and certainly not a pretty site for the banks that have loaned the money either). . In any event, let us put our long-term rational thinking caps on for a moment. If the US and Europe has experienced explosive double-digit gains in the housing markets (a boom, if you will), is it perhaps time for some profit taking? If you do believe that there is a debt and leverage problem affiliated with the housing market in these places as well, then where will this lead socially and economically? The final question is, depending of course how you answered the first two questions - Where do you go? . The surprising answer for some might be - those very countries where credit is strict and housing equity in the hands of the owners and not the bankers. For many people, the equity in their current home is the bulk of their wealth or savings. So, it stands to reason, the opportunity exists to tap into that wealth and buy a home, apartment or small farm in Argentina, Brazil, Dominican Republic, Ecuador and a host of other places where the climate is good year round, real estate prices are not overblown AND whereby perhaps the opportunity exists to draw a tax-free income from the left over funds. So, we started our discussion with the idea that buying real estate abroad may be one of the few legal non-reportable wealth transfer opportunities left (for Americans especially). However, the benefits extend far beyond just that. . . SOME ADDITIONAL INFORMATION:
.Comments from Mr. Graham Hacche, Deputy Director of the External Relations Department at the IMF, September 29, 2004 . The United States, which led the way out of the recession, recently hit a soft patch. With failing fiscal stimulus and higher oil prices weighing on consumption, much will depend on continued employment growth. Nevertheless, this is a soft patch, not a sinkhole. The measured pace of withdrawal of monetary accommodation should continue. On the fiscal side, however, despite recent revenue buoyancy, we see red ink stretching into the future. . Latin America is doing a lot that is right, and it has a period of growth, and it should use the period of growth to strengthen some of those reforms. . http://www.imf.org/external/np/tr/2004/tr040929.htm . OTHER RELATED REAL ESTATE ARTICLES: . http://bigpicture.typepad.com/comments/2005/05/interest_only_l.html . http://bigpicture.typepad.com/comments/2005/05/as_prices_rise_.html . Are you interested in taking the equity gain from your real estate in Europe or the US and buy the dream house in the Caribbean you have always wanted? Can you really afford it? Brand new modern 1500 square foot 2 and 3-bedroom apartments in Santo Domingo start at just US$60,000 (and go up from there). Brand new 2,200 plus square foot homes go for about US$100,000 on up. Brand new Two Bedroom Beach Front condos with private beach club facilities are selling for US$135,000. Want to hear more? Use The Reply Form Here . |
