17th Mar, 2011
Property prices have crashed in many places in the US. Many owners simply walked away from properties and banks are desperate to offload properties. Some companies based in Australia are starting to market to Australian investors. These companies cite great rental returns and good capital growth in the medium to long term. But as with any investment, you need to consider both the investment and taxation implications before jumping in.
1) Investment Decision:
The US is a long way from Australia and keeping an eye on your property will take the services of many. Some of these service providers may be less scrupulous than ideal, especially when it comes to an overseas investor.
Some of the people on your “investment team” will include Real Estate Agents, Solicitors and even US tax accountants. Remember you can’t just pop down and check and the work of a repairman so a good working relationship with your Real Estate Agent will be vital.
The US market is very different from the Australian market. There are plenty of properties on the market in places like Detroit where economic losses have been great. But there are many in the US which advocate a permanent shift in the workers away from traditional manufacturing bases such as Detroit. This might mean prices are low and stay low, and renters may be hard to come by. The point is that information about a market as large as the US is harder to distil than that of investing locally.
Financing might also be very difficult if you need to rely on the US asset as security. Obtaining finance from a US financier will present issues for non residents, especially in the current economic environment.
Don’t forget exchange rate risk either. At the moment, the US dollar is at parity with the Australian dollar. But if our dollar goes up in value in relation to the US dollar, your investment will lose value. Of course if it goes down your investment will be worth more in Australian dollar terms.
2) Taxation Implication:
Australian tax residents are taxed on their worldwide income. This means that you will be subject to Australian income tax on your rental income and any capital gains from the US.
You will also be subject to US tax on your rental property. Here you have a choice. You can be subject to a 30% withholding tax on your Gross rental income. So if you get $1,000 per month, your Real Estate Agent needs to send $300 per month off to the US Government. Alternatively you can elect to do a return in the US and deduct all the associated rental costs. The resultant profit will be taxed at US Marginal taxes. This return will need to be done by a US tax accountant.
When you sell your property and realise your capital gain, there is capital gains tax to be paid in the US as well and a US tax accountant will need to prepare yet another return for you.
When you have done all that, you need to put the income into your Australian tax return. The good news is that you do get a credit for the US tax paid, if any. But if the tax paid in the US is higher than the tax payable in Australia, you won’t get the difference back.
Overall direct investments outside of where you live can present opportunities for those thoroughly versed in the implications, but can equally present a daunting prospect to many.
If you would like to receive more information about the taxation implications of investment in the US or in other countries, please give Scott Trevethan a call to discuss.
