How to buy a NYC apartment: The international edition
There are some additional considerations for non-citizens, including financing and taxes, as well as the types of property that will be available to you.
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New York City real estate has long been seen as a blue-chip investment, especially in Manhattan—that is, until recently. New policy changes, as well as economic and even political concerns, have left foreign buyers feeling apprehensive about purchasing here.
Interest in NYC apartments from foreign investors has dropped off “significantly,” according to Pierre Debbas, managing partner at the law firm Romer Debbas. He attributes it to the dollar’s strength against the yen and the euro, but also political uncertainty.
“People are still enamored but they are waiting on the sidelines, wondering what will happen in an election year, and watching to see if the market is coming down,” Debbas says.
[Editor's note: An earlier version of this post was published in May 2013. We are presenting it again with updated information for January 2020.]
Buyers are also shunning the NYC real estate market because of the higher mansion tax, new transfer tax, and changes in New York state’s rent laws that make investing in property to rent out less profitable.
There may be more bad news to come for buyers: Albany lawmakers are showing renewed interest in instituting an annual pied-à-terre tax. And New York City council members are pushing for a change that would tax homeowners on the actual market prices of their properties—this would affect new buyers only—a so-called "gentrification tax."
The good news is, if you’re an international buyer undeterred by any of these factors, you will have less competition. Brick Underground’s guide to how to buy a co-op or condo apartment in New York City walks you through the steps of the buying process. However, there are some additional considerations for non-citizens, including financing and taxes, as well as the types of property that will be available to you, which you need to know about.
Look at condos over co-ops
Generally speaking, foreign buyers will find it easier to buy a condo rather than a co-op. A co-op building is structured as a corporation, so instead of receiving a deed as you would in a condo, you become a shareholder with a proprietary lease. Co-ops typically demand much more from you in terms of down payment and financial qualifications and also require that you provide extensive information on your finances.
“The co-op board review is a highly intrusive and invasive process, and foreign buyers usually don’t have much of an appetite for disclosure," says Shirley Hackel, a real estate agent at Compass. In the past, some co-ops boards might have been open to taking maintenance in escrow in lieu of submitting tax returns and a financial statement, but co-ops have been caught up in recent rent reforms and this workaround is no longer available.
It’s easier to buy, sell, and sublet a condo, which often appeals to international buyers but that flexibility comes at a price. Condos typically cost more than co-ops and come with higher closing costs.
That’s not to say international buyers can never buy co-ops. Some of these buildings are open to purchases that are pieds-à-terre or parents buying for their grown children. If you find the right building it will help if you have lots of U.S. based liquid assets. Your visa might also be relevant to a co-op application—the best type is one that can lead to permanent residency status.
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Credit history is important
All-cash offers can make you a more competitive buyer in New York City, and for international buyers with high incomes, buying without financing means you don’t have to go through the mortgage process. However, if you need a loan, having a U.S. credit history will become very important.
If you’re new to the U.S. and know you want to buy in the future, the best way to get a good credit score is to get a social security or tax identification number and apply for a credit card, buy things with it, and start paying the bill regularly. It can take a year or two to get a credit rating, so start the process as soon as you arrive.
Arranging financing can be tricky
Not all banks will lend to international buyers so getting a mortgage can be more complicated. Many international buyers do seek financing, says Debbas. “It’s just whether they can qualify—but given how low interest rates are, it is appealing to try and seek financing.”
HSBC is one of the leading banks open to lending to non-citizens but there are different criteria the buyers must reach. The buildings will generally need to be approved based on Fannie Mae guidelines. Some smaller banks may also have lending options for non-citizens.
Understand the tax and withholding implications
As with any major financial transaction, there are tax implications if you own property in the U.S. and if you’re a non-citizen, the IRS takes extra precautions.
Debbas says this is by far the most important aspect of the deal. “The first thing I discuss with [foreign investors] is the tax implications of buying and how to mitigate those implications. We set up various entities and different companies, permissible by IRS regulations to reduce their tax liability.”
Under the Foreign Investment in Real Property Tax Act, someone buying a property from a foreign national is required to pay 15 percent of the sales price to the IRS rather than the seller. Then it’s up to the seller to file the right tax documentation to show they are entitled to get some or all of that money back, depending on the circumstances.
The impact can be even more significant if you are selling at a loss.
“With commissions and transfer tax, sometimes clients don’t have sufficient funds to close so you need to plan for that,” says Max Dilendorf, a partner at the firm Dilendorf Khurdayan.
There might also be estate tax implications. “There is no estate tax exemption for non-citizens so it may come down to structuring the finances through a trust or buying life insurance to offset the estate tax liability,” says Dilendorf.
If you earn rental income from your New York City property, you will face other tax consequences.
Put a team in place
Bearing in mind all of the complexities, know that you'll need to assemble a good team to help you with each phase of your real estate transaction. The team might include an accountant, tax advisor, real estate attorney, mortgage broker, and even a contractor or concierge service.
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