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A HOME AWAY FROM HOME!

Want to buy property abroad?
It’s a great time to do so and here is how you can go about it.
With local property prices soaring, why not look at buying a
home abroad? Foreign real estate may offer good returns on
three counts - bargain prices due to the downtrend in markets
such as the US, Europe and Dubai, a weakening Rupee and
healthy rental yields of over 5 per cent. Real estate markets abroad are also more liquid.
Financing the Purchase So how do you buy? Home purchases in other countries are typically self-financed, as banks in India do not lend for property
purchases abroad. Citizenship and requirements such as
ownership of other assets in the country make it near impossible to get loan from banks overseas.
The purchase amount is subject to the Liberalised Remittance Scheme’s annual limit of $.200,000 per person. Joint ownership and purchasing properties that are still under
construction, where payments are made over multiple years, are typically used to purchase higher
value property.
In addition to the personal financing route, property
investment can also be made through the corporate route.
Companies are allowed to purchase property to be used by
their overseas subsidiary.
This has been the route that is widely used by Indian professionals who are buying property in London. “Using the
company route offers at least two benefits — one can avail
bank loans and avoid large inheritance taxes imposed on
individuals”, says Ahuja. Home loans are available at rates below the rental yield in many countries, including Singapore
and the UK. There is also tax benefit on interest payments.
These properties therefore generate cash, in addition to
having the potential for capital appreciation.
Legal Considerations
Besides the obvious need for due diligence, additional country-specific laws need to be considered. For example,purchasing property in the US
has to be done through a registered agent and the buyer
requires a Tax ID Number (TIN).
In Thailand, foreigners are not allowed to own land, but can
only hold a long tenure lease on
the land. Singapore and Australia require government clearance
for foreigners to own a property with land.
Inheritance laws vary with country and cross-border succession issues can be quite tricky. Inheritance tax rate and laws governing estate transfers
may depend on one’s
citizenship/residential status. In countries such as the UK,
inheritance tax can be quite large— around 30 per cent, vastly
reducing realised returns. One must also consider entry and visa restrictions imposed by the country.
Financing, Tax Aspects
Compared with buying local,
overseas property purchase involves additional expenses and needs to be budgeted. Foreign
exchange rates may move unfavourably, increasing the total
outlay required. Broker fees may
range as high as 5 per cent and legal fees may be an additional 1 to 5 per cent.
Some countries such as Singapore require foreigners to pay an additional 10 per cent
stamp duty on purchase. On an ongoing basis, cash is required for property tax in the range of
0.5 to 2 per cent. This is larger in comparison with the low house tax, typically under 0.5 per cent of the property value, paid in
most cities in India.
Additionally there is a wealth tax levied based on the property
value and one may also have to account for property management and upkeep expenses.
Also, unlike the Indian market where prices have risen even
before the deal is closed, even in
a liquid overseas market, there is
a risk of deflation. This needs to be factored, especially if one has a fixed time horizon for exit.
Income from property abroad may be subject to double
taxation. Even if there is no income from the property, a notional rate of rent may be
applied and taxed.
India has Double Taxation Avoidance Agreement (DTAA)
with countries such as the US,but checking with tax consultants in India and the
country where the property is located will save a lot of hassle.
Global round-up
We have listed some of the popular destinations for property investments, along with costs,
features and rental yield. An investment capital of Rs 2 crore
is used as a base, considering the annual remittance limit of $.200,000 and assuming joint ownership by two investors.