The ability of American citizens to diversify their wealth internationally is slowly being taken away. From the recent imposition of draconian FATCA foreign account reporting requirements to more insidious ways of hamstringing Americans wealth, windows of opportunity are closing for investors.
For example, as of August 1st, U.S. clients of the mega-firm Fidelity Investments who live outside the country will no longer be able to buy or sell mutual funds in their
brokerage accounts. A Fidelity spokesperson chalked up the new restrictions to “today’s continually evolving global regulatory environment.” In other words, Fidelity didn’t
want to take on the growing regulatory risks and compliance costs associated with U.S. citizens living overseas.
Joining Fidelity, Putnam Investments will not accept new investments into existing accounts held by people residing outside the U.S.
A provision of the so-called “HIRE” jobs bill requires that foreign financial institutions withhold 30% of investment withdrawals made by U.S. citizens on behalf of the IRS as preemptive tax collections. Congress, under the guise of a “jobs bill,” has imposed what amount to stealth capital controls.
The government hasn’t formally banned offshore investing or required banks and brokerages to give overseas customers the boot. It has just created a regulatory
environment so onerous that financial institutions are imposing de facto capital controls in order to cut down on paperwork and avoid run-ins with federal bureaucrats.
Escaping an IRS with Global Reach:
Difficult, But Not Impossible
And in order to escape from near impossible tax compliance burdens, an increasing number of Americans who live outside the country are giving up their U.S. citizenship. 2014 is on pace to see record numbers of citizens relinquish their citizenship, far surpassing the record total in 2013.
In 2008, Congress imposed a punitive “exit tax” that applies to citizens who voluntarily give up their citizencitizenship. They face a tax on all their assets based on total liquidation value. So anyone who has a sizable stock portfolio or a coin collection that they had intended to hold on to could effectively be forced to sell everything (after a $600,000 exclusion) and pay taxes on the gains before being allowed to surrender their citizenship.
The U.S. is the only industrialized country that taxes its citizens’ foreign-derived income wherever they are in the world. The IRS will follow you all the way to Timbuktu to collect taxes on any income earned there.
Of course, assets that are held outside of financial institutions are more difficult for the government to track. For now, purchases and sales of physical precious metals remain largely unaffected by the assault on foreign account holders and need not be reported in most cases.
Practical Advantages of Foreign Real Estate
Precious metals are one example of less visible assets. So is foreign real estate. Property owned in a foreign country doesn’t have to be reported to the IRS!
According to the IRS, “Foreign real estate is not a specified foreign financial asset required to be reported on Form 8938. For example, a personal residence or a rental property does not have to be reported.”
This is a great legal loophole for amassing real wealth outside the purview of the U.S. government. Of course, any income or capital gains generated by foreign real estate is still taxable.
But foreign property that you buy and sit on can give you years or decades of financial freedom from the U.S. government. It also gives you diversification out of dollar-denominated assets and into something tangible that can appreciate in value.
You do need to be careful of what kind of market conditions and political conditions you are exposing yourself to when investing in foreign real estate. Alas, you must do your own research on any country of interest or work with a trustworthy expert who knows the ins and outs of owning property in the area.