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Date: Mon, 12 May 2003 08:36:20 -0700
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Hi Nico,
lots of questions. Before giving some general words, let me try to
address your specific questions:
> We are considering a purchase, but will not be able to do it without
> help from family. What is the best way to do that? Is a premature
> inheritance
> (Erbvorbezug) better than an interest free loan from parents?
Whatever suits you best. If you were to get a loan from your parents,
you have to decide on the currency. Given the gyrations in the exchange
ratio, you will be much safer keeping the loan in the same currency as
the property, i.e. a dollar loan on US real estate is much preferred.
I've seen a family loan in Swiss francs, and it ended up in the
payments not taking place when the dollar is too weak. Not good for
family relations.
If you are already a resident of the US, you have to make sure you
comply with US & Swiss gift rules. If you still have a choice where you
are resident, then only dealing with the Swiss rules is much easier, as
most cantons have no or only minimal gift/inheritance taxes.
If you were to get a gift, you can either structure it as such and pay
appropriate gift taxes. A relatively complicated, but possible approach
is, that you get a small gift within the tax exemption and the
remainder as a loan; then each year, you get a gift in the amount of
the exemption so as to minimize your taxes. It's being done, your
accountant will be happy for the extra revenue in administering it.
A straight loan is the easiest to administer; if you get a loan, have
it properly recorded on the house.
> Can parents be
> co-owners?
Surely. But note that more complicated the structure is, the more
things you need to worry about if you are to sell it at some point.
Under most circumstances, the state of California will withhold a good
chunk of the proceeds upon selling real estate to make sure you pay any
applicable capital gains tax. This would mean paperwork for your
parents when selling the house. This can all be done, but you will have
to decide how much complexity you want.
> If I transfer money from my Swiss bank account to my US account,
> does the American finance system care at all how it ended up in my
> Swiss bank
> account?
The money you earned or received as a gift before becoming US resident
is your business. Large Swiss-US transfers totalling billions happen
every day. The log of the transfer will become part of a big database
at the Treasury department, so it can be examined if there's ever a
reason why it should be looked into. But for legitimate business
transactions, there is nothing to worry about.
The one thing you do need to decide upon is whether buying house at
local price levels is reasonable. Real estate is a high leverage
business, and small fluctuations in real estate prices potentially have
a major impact on your net worth. This also means that if you need to
resort to family to increase your leverage, that you have very little
leeway should real estate prices not hold up.
This is not changed by real estate broker talk that "prices always go
up" in this area or something along these lines. No matter whether you
believe prices will remain stable, go up or down with time, your real
estate investment will remain highly leveraged and carry substantial
risk. If the price of real estate goes down, you can easly wipe out all
your downpayment or be left with a negative equity holding. It has
happened in the Bay Area before - in the early nineties, it was "too
expensive" for many to move away as they couldn't bear realising the
loss.
Given that you typically get two weeks notice at a job in the Bay Area,
and that the banks are already very lax about giving out money, you
need to think twice before engaging in a high risk investment.
Obviously if you think you found the right place, or if you are
convinced that your prospective property will appreciate in value, or
if you have stable sources of income that justifies borrowing money
from family, by all means, go for it. If it's only a matter of not
having a US credit history, by all means, don't let that be a deterrent
- accessing family money is definitely an option here.
The Bay Area real estate market has its own dynamics, it's very
different from the national real estate market.
My personal take on the national real estate market is that it is quite
possible for nominal real estate prices to hold up - "nominal" because
either inflation and/or a weaker dollar is going to cause real prices
to suffer in real terms. Debt level in the US combined with record low
interest rate and an assessment that real incomes will not thrive in
this environment are no formula for real real estate prices to move up.
The government and the Federal Reserve have decided we will spend
ourselves (through government spending, increase in money supply & low
interest rates) out of the current economic situation. The approach may
succeed, but expect higher interest rates to come - and be prepared to
sell your house in a few years to someone who will not have access to
current interest rates, and thus may not be able to afford as high a
mortgage as you are planning to get.
regards
axel
Axel Merk
Merk Investments
http://www.merkinvestments.com/
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Received on Mon May 12 2003 - 11:44:25 PDT
