6 Factors to Consider Before Buying a Home Overseas
Military members and their families have long grappled with the difficult decision whether it makes sense to buy or rent a home when moving to a new location. For many families, this perennial question also extends to an overseas assignment, particularly if it will be a lengthy one.
A gorgeous half-timbered German home? An Italian villa in the countryside? A lovely English cottage that would make J.R.R. Tolkien beam with delight? The prospect of buying overseas is definitely appealing.
And why not? As with a stateside purchase, much of the financial concerns are the same. Buyers must evaluate the strength of a market and weigh common decisions, including school districts, commuting distances, safety, and amenities. The same questions must be considered: Will the home appreciate enough to preserve equity, might it be an ideal retirement location, or a desirable rental?
Yet, while the general process and considerations for buying property remain the same, there are several additional risk factors to consider when buying a home in a foreign country.
What You Should Know Before Buying a Home Overseas
1) Acquisition and Initial Financing
The first, easy hurdle to buying a home overseas is to determine if any property restrictions exist for non-residents. While many overseas locations do permit foreigners to buy real estate, these laws are subject to change at any time. If buying property is a possibility, the next step, similar to a stateside transaction, is to secure financing. And that begins with your overseas allowances.
Understanding Your Overseas Allowances
Similar to a stateside assignment, service members will receive a housing allowance, instead known as an Overseas Housing Allowance (OHA). The Department of Defense further defines that, “OHA is comprised of three separate components: rental allowance, utility and recurring maintenance allowance, and a one-time move-in housing allowance (MIHA).”
As with the stateside Basic Allowance for Housing (BAH), OHA financial allotments are based upon location, rank, and dependents. And you are allowed to use OHA to buy foreign property. A notable difference, however, is that OHA is assigned a “cap” and any OHA amount not used is not kept. You do not “pocket” the difference; your unused OHA portion is simply not paid or received as an allotment.
Wrapping your head around OHA can be a little confusing at first, so consider the following examples, first using OHA to rent, then using OHA to buy.
Renting with Overseas Housing Allowance:
Your OHA cap = $2,000 U.S. (equivalent) dollars
A rental = $1,500 dollars
Therefore – you did not “use” $500 dollars of your allotted “cap”
So, you are only paid $1,500 dollars, not the $2,000 of your cap.
Had you been using BAH stateside, you would have simply been paid the full $2,000 and allowed to pocket the remaining $500, no calculations necessary.
Buying with Overseas Housing Allowance:
If you elect to buy a foreign property with OHA (vs. rent), the DoD applies a 10-year period calculation. 10 years = 120 months.
To determine what you’ll be paid in OHA, finance will:
Take the purchase price of your foreign home (let’s say $300,000 U.S. equivalent)
Divide the $300,000 purchase price / 120 months = $2,500
You are paid up to your OHA cap of $2,000 and no more.
As with BAH, there are OHA calculators for you to reference so you can begin to assess what your housing finances may look like, and whether renting or buying makes the best financial sense, both for your family and for given market conditions. OHA is also paid in local currency and adjusts as needed to fluctuations in the U.S. Dollar.
Additionally, due to higher costs of living, some locations will also qualify for Overseas Cost of Living Allowance (COLA) in addition to OHA. Read more on housing allowances and COLA at the Defense Travel Management Office site.
2) Mortgage and Underwriting for a Foreign Home Purchase
While there may be no restriction to buy property, figuring out how to finance it in your host nation is another issue. U.S. lending institutions, like the military-friendly USAA, do not underwrite foreign mortgages. Stateside home financing options no longer apply, including the appealing VA Home Loan. This means you will need to use a local, host nation financial institution.
And lending requirements do tend to vary for non-residents. Mortgages are often only extended for up to 60-70 percent of the purchase price, meaning borrowers must have a significant down payment available. Additionally, foreign banks often offer a shorter underwriting period--10 years is typical.
Typical transaction fees, including a variety of taxes (transfer, planning, registry, stamp duties, etc.), and buyer’s fees are usually not rolled into the mortgage, meaning a hefty down payment plus additional funds to cover fees and taxes will be needed to secure the loan.
Investigate and prepare for different Seller and Buyer commissions and fees. In the U.S., real estate commissions are typically split between the Seller and Buyer, but that is not the case in every country. In some countries, the entirety of the real estate commission falls to the Buyer... which means further funds on top of the down payment. You will also most likely need to budget for a translator, as most documents will be generated in the host nation’s official language, whether you are fluent in the language or not.
With few exceptions, foreign banks calculate the entirety of your mortgage interest into your loan – which you are responsible for paying in full. There is no such thing as ‘paying down the principal’ amortization strategy, to become “debt-free” quicker.
Your loan = ALL of the Interest + Principal, no matter how soon it’s paid off.
Lastly, in addition to providing documentation that you have a sufficient income stream and down payment to complete the transaction, some banks will go so far as insisting upon an additional life insurance rider or coverage that guarantees another source of income to pay back the lender, in the event of death!
Borrow wisely and carefully calculate if you will be able to hold the home long enough for it to build equity and for you to recoup your investment.
3) Appreciation and Building Equity
Due to varying building and permit laws, home sales may be slower than what you’re used to in a U.S. market.
Cultural differences are also worth noting, as in many countries, the notion of “fixing and flipping” a home in a highly appreciating market may not be a viable profit strategy. Many cultures see buying a home as a very permanent action, and once they buy will hold the home for the remainder of their lives and pass the home down to further generations.
Without the constant flurry of home buyers, there is limited upward market pressure to raise prices, and it may take quite some time for a foreign property to build equity through market appreciation.
4) Selling a Foreign Property
Realizing Profit and Capital Gains Considerations
When you sell a house, it may be subject to or excluded from taxes on the capital gain. (Capital gains = the difference between what you paid for an asset — your basis — and what it is sold for).
The IRS typically allows you to exclude up to:
$250,000 of capital gains on real estate if you’re single.
$500,000 of capital gains on real estate if you’re married and filing jointly.
As long as the home was your principal residence for at least 2 of the previous 10 years (for military service personnel, see IRS Pub 523 for full detail).
But … that’s U.S. Capital Gains Tax Law.
And while the U.S. Capital Gains exclusion applies to a primary residence which can be stateside or abroad, a foreign property in a foreign country will also be subject to applicable foreign tax law. While you may be excluded from the IRS, you likely will not be excluded from any applicable foreign taxation. For example, there may be longer holding periods that you must own and live in the home to avoid foreign taxes on capital gains (In Germany, this period is 10 years!). Additionally, any shielded exclusion limits for taxation will vary country by country.
Ensure that you determine what taxes you will be responsible for, and when, in realizing any profits, before you buy.
5) Maintaining a Foreign Rental Property
Maintaining a rental property can be challenging for the most seasoned of property owners. If you're considering buying a foreign property, take time to assess and mentally prepare a strategy for how you will maintain the home as a rental.
Foreign Landlord/Tenant Law
No matter what country you’re in, some form of Landlord/Tenant Law will apply. If your strategy is to simply rent to other U.S. service members, understand that most overseas military installations will require you to register and maintain the home in accordance with the applicable base housing management office. Why?
For service members to receive OHA, i.e. get “their housing allowance turned on,” the installation’s Housing Office reviews AND approves, or denies, all off-base rental contracts. A service member cannot receive OHA without stamped approval from the installation’s Housing Office.
This policy was initiated in an effort to help protect service members from unscrupulous landlords. Inspections are mandatory, and rents are typically capped and based upon square footage.
This means that if you expect to rent to a service member, you must be in full compliance with the base housing office. It also means that you may experience rent caps and receive less in rent than what you may need to cover your mortgage.
If you anticipate renting to the general population, in addition to U.S. service members, it would be in your best interest to bring in an expert on housing law--a local property manager.
Foreign Property Management
Hiring a local, foreign property manager will likely be worth it for their housing law and tenant screening expertise alone. If you find yourself balking at the idea of handing over a percentage of gross rents, realistically consider the ins and outs of how you would realistically turn over a property between tenants in a foreign country.
Ask around and start the search for a property manager early if you are anticipating a PCS.
6) Taxation on Foreign Property
Tax law in any country is complex, and foreign tax law is no different. But, tax law as a U.S. Citizen while owning a foreign property can become sticky very, very quickly, as the United States taxes its citizens on their worldwide income. If you are living in a foreign country and also making foreign income, such as Gross Rents from a rental property, you are now subject to your own U.S. tax law, as well as your host country’s tax laws.
Foreign Rental Income
If you PCS and keep your foreign home as a rental, you will now have Foreign Rental Income, which, at a minimum, must be reported to both U.S. and Foreign Taxation Offices. This means that you will be required to file a tax return with both the foreign government as well as declaring the income to the IRS.
While the U.S. does have established tax treaties in place with most countries to help limit “double taxation” on the same income, your foreign rental income might not be shielded from being taxed twice. There is the Foreign Earned Income Exclusion (FEIE), but rental income is passive income, not “earned” income, i.e. income from employment such as wages or W2. Your foreign rental income may qualify for a Foreign Tax Credit (FTC), but the IRS compliance requirements in order to offset taxation can be quite dense to decipher. Additionally, each taxpayer’s situation is unique, so hiring an accountant well-versed in foreign taxation is crucial. There is no Turbo-taxing shortcut here.
Risk of Tax Pursuit by a Foreign Government
Many service members have gone on to buy foreign properties, profitably hold them as investments, and with due diligence and determination mastered the intricacies of foreign property ownership. Some have even enjoyed their overseas assignment so much that they chose to become expats, and permanently live and work overseas upon retirement from the service.
For others, though, buying foreign property has launched a nightmare scenario.
In an overseas assignment, the U.S. has negotiated Statute of Forces Agreements (SOFA) with each foreign country U.S. service members are stationed in. SOFA establishes a number of policies, but one in particular is the exclusion of service members, and DoD civilian income, to foreign taxation while the member is on orders to an overseas assignment.
Recently, the action of buying a home has been increasingly viewed by some governments as an intention to “homestead” in the foreign country. “Why else would you buy a house, if you have no intent to live in it forever?” can be a common cultural assumption.
As governments across the world feel the pain of shrinking budgets and expanding social programs and citizen demands, some governments have started aggressively looking for any additional income wherever they can find it. If it can be argued, even marginally, that the requirements for taxation Residency Tests are met, income normally shielded via SOFA can be pursued to foreign income taxation.
While an aggressive tax pursuit may not be the default scenario, do take some time to consider that, when you buy a foreign property, you are indeed establishing ties to that country. And whether factual, or not, tax-starved governments, both local and national, may take notice.
Evaluating housing decisions while serving in the military has never been an easy task. It’s an exercise full of emotion and doubt, the nagging worry we saddle upon ourselves as we ask, “Is this the right decision?”
While there is never a single right or wrong answer, hopefully these additional factors will help guide your decision in weighing whether to buy overseas. Remember, you are never alone – there is a wealth of information available here at MilitaryByOwner! Each article and ebook available at MBO is written by real estate experts who truly understand the housing challenges facing the military community and offer thorough and timely resources to provide you with actionable knowledge to make the best housing decisions for your family.