I Own Property Overseas with Good Equity, but Should I Cash-Out and Buy Property in the U.S.?

7 years ago · 4 minute read

AMA question #10:

“I have a property which is overseas and I have equity in it of about $150,000, with tenants in it. It doesn’t really bring me in an income but it is paying down the mortgage. I really want to make sure that that property or the investment is something for my future (it’s my nest egg). Should I keep the property or move that cash into something here in California? How can I make the most of what I have?”

Here’s our answer.

Key points:

• Better appreciation in California vs Overseas, most likely.
• Having something closer to home is never a bad thing in real estate.
• A few potential tax advantages for him to enjoy if he invests in the US, this is where he’s going to be long-term:
  • 1. Depreciation write off.
  • 2. $250K/$500K gain option, if he lives in it for 2 out of 5 years before selling.

AMA Video Transcript

Nate Broughton: So, I have a property, which is overseas, and I have equity in it of about $150,000. There’s tenants in there, so they’re paying rent right now, paying down the mortgage, but it doesn’t really bring in any income. Our person actually lives here in California now, so this is back in his homeland where he’s got this property. He’s curious what he should do with it because it’s kind of his only nest egg. Should he keep the property over there, or should he cash out and move into a property here in California? How can he best take advantage of what he’s built over there for the next five, 10, 20 years?
Dana Robinson: All right. There’s a lot to unpack with this question, but I think it’s a great question to talk about the different motivations for owning real estate. One of the things I would consider is, if he’s going to stay in California, he wants to own real estate in California. It’s going to appreciate, and he’s going to lock in his property tax base under Prop 13 at today’s value.
Nate Broughton: Yep.
Dana Robinson: So, if he plans to be here until he retires, he needs to own a property that’s in California. One thing to start with is maybe comparing what’s the appreciation rate in his home country. What’s that $150,000 in equity going to look like as that property goes up a little in value every year, compared to if he deployed that capital for, say, an $800,000 duplex in Southern California?
Nate Broughton: Right.
Dana Robinson: You can look online, find some statistics, and take a guess at that. My guess is it probably makes sense to move the money to California. He also mentioned in the voicemail that he wants something that he can live in and own. A lot of times, people don’t consider that they could buy a duplex, triplex, or four-plex, and live in one of the units.
Dana Robinson: A great strategy that’s sort of double opt-out would be to move the equity here. Sell that property in the foreign jurisdiction, probably have a little bit of tax. Buy the property here, buy say a three-plex, a house with two units behind it. This might sound expensive to our listener, right? That might sound like $800,000. I can’t afford that. Well, you have two units generating income that will be credited toward you when you go to qualify, and when you own it, the rental income from those two units goes to help cover those costs.
Dana Robinson: A cool little hint when you’re buying a three-plex, you can elect to live in a smaller unit, so you could have two one-bedrooms and, even though you want to live in a house eventually, you can rent the house to someone for thousands of dollars a month, stay in the small one yourself for a year or whatever. You can get the bank to qualify you with the higher income from the rental of the big house and credit that toward your ability to cover the mortgage. You get a much better loan with the living situation. I’ve done this once. You need to explain why you’re going to live in the little one.
Nate Broughton: Sure.
Dana Robinson: You can say, “Well, I don’t have kids, and I want the higher income.” They’ll take a reasonable explanation for that.
Nate Broughton: So, yeah, I think California is a great place to be investing. I am an advocate of investing close to home. If you’re going to be here in California, do that. It’s better than having a property that’s far, far away. There are a lot of creative financing things that you can do, low down payment options, along with the things that you’ve just explained, getting rental income credit towards the down payment.
Nate Broughton: What about depreciation and other tax advantages? I think, not making any assumptions about the taxes over in the foreign jurisdiction, but here in California, these are reasons why we advocate for U.S.-based people to invest in real estate.
Dana Robinson: Right. Depreciation is a concept everyone who is going to invest in real estate ought to understand clearly. If our listener buys a property that’s a rental property, at least part of the property is a rental property, they get to write off, over 27 and a half years, the structures. That sounds crazy, but the structures go down in value, even though the land is going up in value. You get to write those off, even those it doesn’t cost you anything. It’s invisible tax savings.
Dana Robinson: For our listener, that might be $5,000 or $6,000 or $7,000 a year in additional tax savings through depreciation until this loan is paid off. Imagine if he had someone giving him $400 or $500 a month in extra rent. The IRS is just giving you that because you’re getting depreciation that you offset against other income. And, at the end of a certain amount of time, if it’s gone up in value, and you’ve lived in it two out of five years, you can actually sell it if you want and keep $250,000 to $500,000 in tax-free gains.
Nate Broughton: Yeah, I love that option. You could even live in this place for a couple years and maybe wants to start a family. He moves out, he keeps it as an investment property. Twenty years from now, when he’s reaching retirement age or whatever, him and his wife move back in for two years, and you can still take advantage of that gain. I think you want to position yourself for where you’re going to be down the line, where you can do that and also enjoy the depreciation along the way, as you’ve said, and that California appreciation.