Key to buying a piece of real estate in another country is getting the cash required to close the sale where it needs to be when it needs to be there. In fact, as a would-be overseas property owner, you potentially face three international money management requirements. First when you buy; second if you renovate; and third when managing a property as a rental.

The most important thing to understand before wiring money to another country is whether that country imposes currency restrictions. Most don't, but, if the country where you intend to buy real estate does, you want to understand the restrictions before committing to a purchase. This is something to discuss and clarify with your local attorney. Colombia, for example, requires that any incoming funds be registered with the country's central bank. If the funds are for living expenses, for example, then you complete one form (Form 4). If the funds are for investment, then you complete a different form (Form 5), indicating what type of investment you're making. Complete the incorrect form or fail to file one at all, and you will have a difficult time repatriating your capital and any associated profits. Complete and file all the paperwork correctly, and you should have no problem taking your money back out of the country if and when you decide you'd like to.

Brazil imposes similar rules. In this case, though, friends who've bought in this country report that, even if all the paperwork has been processed as called for, it still can be difficult to get your money out. Argentina had such strict controls in place at one point that getting any hard currency out of that country was all but impossible. Selling your property to someone with funds outside the country became the easiest way around the restrictions. While this works in your favor when selling, be careful when buying this way in a country with currency controls. You don't want to end up with a higher tax burden when you sell because you can't prove the provenance of the original investment capital.

Escrow doesn't exist in most of the world. This is because title companies don't exist in most of the world, and title companies handle escrow. Typically, therefore, when purchasing real estate in another country, you'll send the required funds to your notaire or your attorney who, depending on the country, might have a client escrow account. This can work if you trust your attorney with that much money (even an honest guy can be tempted to retire early if enough money is made available to him). Another, sometimes safer option can be to send the funds to your own bank account in the country and have your bank issue a certified check to hand over to the seller at closing. If you can get the seller to agree, you can try to use a U.S. escrow company, but most sellers in most of the world won't understand what “escrow” is, and, if they do, they won't like the idea of the funds for the closing sitting in another country. In the case of Argentina, the currency house you're using for the transaction effectively acts as the escrow company.

No matter the final solution, you'll be wiring the funds required. Some online banking systems allow you to initiate a wire from your account online, but, if you're new to international wires, we recommend going into your bank branch to request the wire and fill out the paperwork in person. The timing is important, as you'll need to initiate the wire in time to allow the funds to arrive well in advance of the closing date. Depending on the routing, a wire from a U.S. bank to a Latin American bank can arrive the same day, or it can take up to a week. Wires to Europe typically take three to five business days. Much can depend on the correspondent bank. With one, the wire might arrive the same day; with another, it could take up to five days. Much, too, depends on the receiving bank. Some banks post incoming wires to the client's account within 24 hours; others hold the money in limbo for a few days. There's nothing you can do about this except be informed and prepared.

To send a wire, you'll need instructions from the receiving bank, whether it's your own bank or that of your attorney or notaire. Financial institutions in the United States use mostly American Bankers' Association (ABA) numbers for in-country transfers and SWIFT numbers for incoming international wires. The international bank account number (IBAN) system, used mostly in Europe, is more efficient, as the coding for an IBAN number references both your bank and your account information, minimizing the risk of misrouting.

The wire instructions may include information about the recipient bank's correspondent bank or intermediary bank. Much of the time this isn't necessary, though, because banks can access this information on their own. Most banks work with more than one intermediary bank, so don't be alarmed if the wire instructions you're provided include options or a chain of banks.

Increasingly, any sending bank is going to ask for full address details for the recipient bank and the owner of the recipient bank account. The sending bank may require phone numbers for both, as well. It's best to ask your bank what details it requires for an international wire before making a transfer request to avoid it being denied.

If you're wiring the funds to your attorney's client account, notify your attorney when you request the wire. Provide him with details of the sending bank and the amount of the wire, so that he's able to confirm receipt with his bank and make sure the funds are properly credited to you.

Note that if you purchase preconstruction, you'll have a series of money management requirements. You'll make a down payment when you sign the purchase agreement, then you'll make staged payments to the developer throughout the construction process, with one final payment due at closing. In the case of a preconstruction purchase from a developer, you can opt to wire funds directly to the developer. This works as long as the country imposes no currency or flow of funds restrictions (most countries where you'd be interested in buying don't), and it simplifies things, removing one layer of risk. In the case of Colombia or Brazil, however, or any other country that does impose currency controls, the best option is typically to wire funds into your or your attorney's account so that you can be certain the money is properly registered. Then arrange a transfer from your or your attorney's account to that of the developer.

If you purchase a place that requires renovation work, you'll have additional money-management requirements. You'll need to get money into the country as required to cover the associated costs. In this case, you'll need your own local bank account to which to wire funds and from which to pay your contractor, electrician, plumber, carpenter, and so forth.

Sometimes It Makes Sense to “Buy Ahead”

If you're intending to send a big amount of funds of one currency (say U.S. dollars) to a country where the currency is something else, you have an exchange issue that could work in your favor, or not. You shouldn't try to time currency movements. You can't. Nobody can. You can, though, if you deem it prudent, eliminate future currency risk by locking in a current rate of exchange. You can also make sure you get the best possible rate of exchange at the time you transfer your funds. You accomplish both these things by running the money you intend to transfer through a foreign exchange house.

Say you want to buy an apartment in Paris or a farmhouse in Tuscany. You'll need euros. Wire the money for the purchase from your U.S. bank account directly to Europe (either to an account you hold there or to your attorney or notaire's account), and, in most cases, your U.S. bank will exchange your U.S. dollars into euros before making the transfer. The more money you send, the better exchange rate the bank will give you, but, generally speaking, the rate of exchange used won't be the best possible or even good. For small wires, it may not be worth the trouble, but, if you're sending a sizable amount, you could benefit significantly from the better rate of exchange available from a foreign exchange company. The difference between the conversion rate used by your bank and the one used by a foreign exchange house could mean the difference of a few hundred or even a few thousand dollars.

In addition, if you're concerned about which way a currency is moving versus the U.S. dollar, you can remove any future exchange risk by buying that currency ahead of time. Returning to our Italian farmhouse example, say you're planning to buy one next summer. Your budget is $200,000. You could exchange $200,000 now for euros, with the help of an exchange company, and then sit on those euros until time for closing. Again, this could work to your advantage or against you, but it could also allow you to sleep better at night between now and whenever you finally close on your euro purchase.

We've worked with a number of currency exchange companies over the years. Like banks, they merge and change name and new ones open up, so the best way to find one is simply to check online when you're ready to open an account. These companies are trading and moving currencies back and forth, one to another, all day every day and, therefore, can give you a better exchange rate than your bank. Opening an account with one is like opening a bank account, but you can do it all online. You'll have to provide basic know-your-client information. That accomplished, you have access to the group's better rates. This strategy can make particular sense if you know you'll be sending multiple wires for a renovation, staged preconstruction payments, or mortgage payments.

How and Why to Open a Local Bank Account Overseas

Sometimes you'll have the need to receive funds in another country directly. Maybe you'll want to wire your own funds from the United States to yourself in a place where you're renovating a house you've bought. If you invest in a rental, you'll need to be able to take receipt of the rent each month. In addition, as a property owner anywhere in the world, you'll have local expenses—property taxes, perhaps; other taxes; building fees; plus electric, gas, phone, cable, and Internet bills. We've known people who have tried to manage these things without benefit of a local bank account, but it's not easy and we'd say not worth it. The only reason to try to accomplish these things without a local bank account would be because you're unable to open a local bank account for some reason.

This isn't out of the question, because, unfortunately, it's not easy for an American to open a bank account in many parts of the world. It can be difficult, but it should almost never be impossible if you have a valid reason for wanting the account. Owning property in the country is a valid reason.

To open a bank account in another country, you'll need your passport, a second ID (your driver's license works), and a reference letter from at least one bank back home. You may also be asked for a reference letter from your attorney or your accountant. This is another reason to use a local attorney for your real estate transaction, because he or she will be able to provide a reference letter if you need one.

Be sure to ask about the bank's online access. You'll want to be able to check balances, move money, and, if possible, pay bills online. Most banks in most of the world offer online banking access. However, the level of service likely won't be what you are used to back home, and it may not be in English.

If you're investing in a rental property, we suggest opening a savings account as well as a checking account. This way, you can use the checking account as an operating account and move excess funds, as they accumulate, into the savings account. Don't keep a lot of money in your overseas checking account if you can help it. Forged checks and cloned automated teller machine (ATM) cards are not uncommon in some countries, and most banks in most of the world aren't going to make good if money is stolen from your account in either of these ways.

In that case, you may be wondering, wouldn't it be prudent to transfer excess funds, as they accumulate, from the foreign checking account to a U.S. savings or investment account? Typically, no. One big reason to be buying real estate overseas is for diversification, including currency diversification. If you transfer all the rental revenues that you earn from your rental property in another country to U.S. dollars in a U.S. bank account, you're interfering with your diversification agenda. One reason we bought an apartment in Medellín, for example, was to diversify into Colombia, the economy, and the currency.

When you accumulate funds enough in your overseas savings account to warrant it, you could consider other options for holding cash in that country. You could open a local certificate of deposit (CD), invest in the local stock market, use the money as the down payment on a next real estate purchase, or view the cash as a fund to cover personal expenses whenever you're in the country. Say you spend six months in France each year and rent your apartment out the rest of the year. You should (all things going according to plan and after all expenses and bills have been covered) end up with extra euros in your French bank account. You could use those euros to cover living expenses when you're in residence yourself, reducing your exchange rate risk. Rather than having to convert dollars to euros for every visit, you'll have cash earned as euros to spend as euros.

When You Exit

When you decide to sell, the proceeds from the sale can be deposited into your local bank account. Definitely, if the country where you're selling imposes currency restrictions, you'll want to have the funds put into your local account. Then you'll file the proper paperwork allowing you to wire the funds out of the country if that's your plan. Before returning that lump sum to U.S. dollars and to U.S. shores, consider your options. Remember that one big objective of the original property purchase was diversification. Bringing the proceeds from the sale of that piece of property back into the United States undermines that agenda.

If you're intending to buy something new in the same country, your decision is easy. Leave the money where it is until you're ready for your next purchase. If you're thinking of buying in another country, again, we'd suggest leaving the money where it is while you finalize your plans (unless the interim period extends indefinitely; in that case, you may want to find a better use for the sale proceeds in the meantime).

As an American, you'll have the same tax implications when you sell your overseas property as you would when selling a piece of property in the United States. If it's been your primary residence according to the IRS regulations, you can exempt gains from U.S. tax up to the current limits (right now that's $250,000 for a single taxpayer and $500,000 for a couple).

If you purchase rental property overseas, you'll then be required to file a Schedule E with your U.S. returns. You'll also be able to recognize associated depreciation of the asset for U.S. tax purposes (amortized over 40 years for foreign property). When you sell an overseas rental property, you'll be liable for depreciation recapture taxes along with any capital gain tax on the amount above your original basis.

You'll also likely have some tax obligation in the country where the property is located, although not all countries charge capital gains taxes on real estate (Croatia, New Zealand, and Argentina, for example, do not). Most countries that tax capital gains from the sale of real estate do so at particular rates separate from other income tax rates. A few countries tax gains on the sale of real estate as ordinary income, meaning the standard marginal tax bands determine the tax rate.

Don't worry about paying taxes twice on your gains. If your gain is taxable in both the country where the property is located and the United States, then you'll be able to take a tax credit on the U.S. side, limiting your total tax to the maximum due in either country. For example, if you pay 10% tax in the country where the property is located, then you'll pay another 5% or 10%, depending on your total income in the United States. If you pay 30% tax in the country where the property is located, then you'll owe nothing in the United States.

Note that, if the property is held by an entity, it is customary for the shares of the company to be sold (instead of the property itself), thus eliminating local transfer tax.

Can You Use the Proceeds in a 1031 Like-Kind Exchange?

One tax benefit available to U.S. investors in property overseas is the 1031 like-kind exchange. Briefly, this is a tax loophole that allows a real estate investor to defer tax on his gains by following specific rules allowing him to reinvest the proceeds from the sale of one property into the purchase of another. Most U.S. investors take advantage of this strategy when selling one piece of U.S. investment property to buy another.

This loophole works for U.S. taxpayers when they sell foreign property, as well, but only when the funds are invested in other foreign property. You can avoid tax on the gains by transferring the proceeds from one piece of property to the purchase of another, but it must be U.S. property for U.S. property or foreign for foreign.

Before using this tax rule with real estate overseas, be sure it makes sense. If you're paying a capital gains tax in the foreign country anyway, then the advantage of deferring your U.S. tax through a 1031 like-kind exchange probably isn't as great as taking the credit for the taxes paid in the other country. If you were, say, selling a piece of investment property in New Zealand, however, with the intention of using those proceeds to purchase another piece of investment property in Colombia, then the like-kind exchange could be a great benefit. You wouldn't be paying capital gains tax in New Zealand (as it doesn't charge any), so deferring U.S. tax is the right choice.