When comes to property
investment in the United
States
The wife and I had the
opportunity to find out more on the subject matter when we recently attended a US property seminar in conjunction with the
road-show for The Legacy at Millennium
Park - a residential project located
in downtown Chicago
Although the
illustration of costs and taxes applicable are specific to the state of Illinois and particularly to Chicago
- these vary from state to state within the United
States - it does provide one with some perspective of
what to expect when purchasing and subsequent sale of a US
Acquisition Costs
This is incurred at the
point of purchase, in addition to the purchase price.
1. Transfer Tax
Transfer tax is imposed
on grants, assignments, transfers or surrenders of real property. In the city
of Chicago
Paid by
Seller
|
Paid by
Buyer
|
|
State
|
0.1%
|
-
|
County
|
0.05%
|
-
|
City
|
0.3%
|
0.75%
|
Total
|
0.45%
|
0.75%
|
2. Legal Fees
Legal fees cover the
cost of hiring an attorney to conduct the conveyancing on the purchase of the
property. Each attorney sets their own rates. If you are financing the purchase
of your property with a mortgage, you will also have to pay your lender's (e.g.
the bank that you take the mortgage from) legal fees.
3. Mortgage Costs
This include the
arrangement fee charged by your lender and the cost of using a mortgage broker.
Operating Costs
This refers to
expenditure incurred throughout ownership of the property.
1. Property Tax
This is based on the
value of the property and the maximum rate equates to approximately 1.72%.
2. HOA Fees
HOA (Homeowner
Association) fees are also known as common charges. This is a fee paid by all
property owners to maintain the common areas of the property as well as cover
other costs associated with the building. These fees are typically charged on a
per-square-foot basis and vary based on the building's features and amenities.
3. Management Fees
These fees are charged
by a lettings and management agency for their services, including locating a
tenant and contract renewal.
Using the example of The Legacy, the total operating costs - which include property tax,
HOA fees, management fees and homeowner's insurance - add up to 50% of the
gross rental yield (estimated at about 6% per annum).
Taxes
This is paid at various
points throughout the ownership of a property.
1. Income Tax
Rental income is
subjected to income tax which is payable to the state and federal governments.
Income tax is charged on net rental income after deducting eligible costs such
as mortgage interest, property tax, HOA fees and management fees - we were told
that even the air ticket that you paid to go inspect your property is a valid
deduction.
There is no income tax
imposed at the city level in Chicago
Typical
income tax rates
paid by
investors
|
Federal 10%
|
State 5%
|
City 0%
|
2. Capital Gains Tax
This is a tax on profit
(or gain) made on an asset, payable upon disposal of the asset.
It is charged on new
gains after deducting all relevant costs, including acquisition and sale
expenses, property improvement costs and depreciation.
The wife and I were told
that despite the capital gains tax being at 20%, this may go down to as low as
5% after all applicable deductions.
Typical capital
gains tax rates
paid by
investors
|
Federal 15%
|
State 5%
|
City 0%
|
We hope the above will be helpful to those who are looking to invest in the United States
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