You just purchased an investment property in the U.S. because you believe that the real estate market is undervalued. The reality is that if you pass away you may have to pay a lot of money to the IRS.
One of the reasons you purchased the property is because you wanted to take advantage of a low interest rate environment and get a mortgage on the property.
Let’s assume you are not a citizen, and you don’t live in the United States, then you are considered a foreign national.
Foreign Nationals with Properties in the U.S. need Life Insurance
- You purchased a home for $500,000.
- Your lender found you a foreign national mortgage for $250,000 at a around %5 interest rate.
- Your monthly payments for the mortgage are approx. $1,700
- You have the property rented for $2,000 so the rent pays for the mortgage.
What happens to the property if you pass away?
Let’s say that the property has not appreciated.
Your family will have to pay Estate Taxes on the property. Estate Taxes are essentially death taxes. Please talk to your accountant to find out how your Estate will be taxed!
When you die your family will need to come up with approximately $98,600 for Estate Taxes. This calculation comes using %34 in taxes, and the foreign national exclusion of $60,000. (Again these rules are very complex. This calculation will depend on what type of mortgage you have and many other rules. Speak to your accountant or tax attorney to find your exact numbers).
The IRS will need the payment of $98,600 in 90 days. Which leaves your family with very little control.
No Protection for Your Mortgage
Strategy 1: The typical scenario for Foreign Nationals.
Your family has to sell the property because you don’t have $98,600 to pay the Estate Taxes.
Lets assume that they can find a buyer for $500,000.
They will have to send the IRS a check for $98,600.
They receive $401,400 however they will have to pay the mortgage to the bank for $250,000.
They are left with a total of $151,400.
Protecting your Property from Estate Taxes
Strategy 2. Protection with Permanent Insurance for a Foreign National.
You did a great job planning and you purchased a permanent life insurance for $98,600 which will cost you about $85 per month (for a healthy 45 year old).
When you pass away:
- Your family sends the death certificate to the Life Insurance Company
- Your family gets a tax free check of $98,600
- Your family sends that payment to the IRS to pay your Estate Taxes
- Your family keep the house worth: $500,000 and they keep the monthly rent that pays the mortgage: $2,000 per month
Protecting your Mortgage and from Estate Taxes as Foreign National
Strategy 3. Protection with Term Insurance and Permanent Insurance:
Your life insurance agent did a great job and convinced you to purchase not only a permanent insurance for $85/month, but also a 30 Year Term insurance to protect the mortgage for approx. $60/month.
At death your family claims both the permanent and the term insurance:
- Sends the $98,600 tax free check to the IRS.
- Sends the $250,000 tax free check to the mortgage company.
- They keep the property worth $500,000 with no mortgage and they have rental income of $2,000 per month.
As you can see these strategies work very well under the right circumstances! Take control of your foreign nationals mortgage, and add a protection from estate taxes.
If you would like a quote and find out if this strategy works for you contact us here: [email protected]
