A common occurrence is for a U.S. citizen or permanent resident to buy U.S. real estate with the assistance from a Non-Resident Alien (“NRA”) relative such as a parent, sibling, or grandparent.
Usually the initial contact person will be a real estate broker. In California, the vast majority of real estate brokers will use standard California Association of Realtor (“CAR”) forms.
It is important to know that the standard CAR disclaims responsibility for any legal or tax advice. This obligation and risk is contractually put onto the purchaser or seller, meaning the purchaser or seller is obligated to separately consult and arrange for any legal or tax advice.
Since the real estate broker is being paid on commission, his or her main interest will be to complete the sale of the property as soon as possible. Any due diligence regarding the condition of the property, tax planning, or consideration of legal implications will be viewed by the realtor as a potential risk of causing the sale to be delayed or fall through.
One question that will have to be decided at the time of purchase is who and how to take the title to the real property. Often the NRA relative who is contributing money will want to have some control or interest and be named as co-owner to the real property.
The impact of this decision, without proper legal and tax planning, runs a significant risk of a surprise tax hit or legal claims. Depending on the objectives there may be alternate solutions to meet the objectives of the contributing NRA relative.
The best time to properly structure an acquisition or sale of California real property is prior to the acquisition, or immediately thereafter. As one builds equity over time, the longer the wait, the higher the risk of the tax implication. Another factor is how the property is transferred, by gift or by sale, or a combination of both.
If you are a foreign investor interested in acquiring California real property, there are significant and complex tax, legal, and business cost considerations. You do not want to be caught unaware and wind up paying more money than is necessary, with less remaining for your family members.
For additional information on structuring a California real property investment, please contact the Law Offices of Hanlen J. Chang.
Additional information can also be found in this prior post.