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.

meera.siva@thehindu.co.in

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