As a foreign investor looking for a Manhattan property to purchase and rent out, you need to find an international tax consultant who can help you navigate the complicated tax code here in the United States.
Here is a crash course but please consult an accountant or your attorney before making any purchase. Let’s say you buy an investment apartment for $2.75 million and you collect $9,000 per month in rent with $3,000 in condo charges including your common charges and taxes.
$9,000 per month income
$3,000 per month building charges
$6,000 profit per month or $72,000 per year
So you make $72,000 per year in profit and have to pay US taxes on that correct? Not so fast. In the US, you are required to take something called depreciation on your property which is based on 27.5 years. So the apt cost $2.75 million and you depreciate $100k each year. ($2,750,000 divided by 27.5 years is $100k)
So guess what? The $100k in depreciation wipes out the $72,000 gain from rental income and you do not owe anything in taxes here in the US. What’s the catch?
The catch is that when you sell in 10 years, your original cost was $2.75 million but in 10 years you depreciated the property a total of $1,000,000 so as a result your cost is actually only $1,750,000 not $2,750,000. So any amount above that will be taxable. End of the story? Not quite. Most investors who sell a property like this purchase another one and through a vehicle called 1031 exchange you can rollover(defer) the taxes to the next property!
So please make sure if you are purchasing an investment property in Manhattan as a foreign national, you find an experienced international tax consultant who can help you to minimize your tax liability. Usually, an experienced real estate broker can recommend someone to you.