Portfolio analysis with home purchase-Outside the US

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avlfutbol
Posts: 15
Joined: Fri Apr 17, 2015 11:44 pm

Portfolio analysis with home purchase-Outside the US

Post by avlfutbol » Mon Oct 30, 2017 10:07 pm

Thanks in advance for any feedback. I am a US citizen living outside the US with a foreign based contract and no US income in a developing country. So because of that, I do not have access to future Roth or 401K contributions. Exchanging money from the local currency is not easy because it is not available with interactive brokers or other currency exchange platforms. My contract is indefinite, and I would like to remain in the country for the long term. COL is cheap and I earn an exceptional salary in the local market. This could end at anytime, however if I own a home, my financial needs become much less to comfortably survive in the country should my job change. However, I am paying through the nose in taxes. Due to PFIC, I have limited options to decrease my tax burden. I cannot contribute to the countries 401K equivalent. Sending money backhome comes at a 3% conversion fee. However, there does exist another option to decrease my tax burden by 40K a year in USD equivalent. My questions are below.

Emergency funds: 5K USD, 85K foreign currency
Debt: None
Tax Filing Status: Single
Tax Rate: 25% Federal US, NA% State; 34% home country so should never pay US taxes, no tax treaty
State of Residence: NA
Age: 38
Desired Asset allocation: 80% stocks / 20% bonds
Desired International allocation: 30% of stocks
Income: 140K
Total Expenses: 34K and living very well

Current retirement assets: 350k

Taxable
7.0% Vanguard Emerging Markets (VEMAX)
21.9% Vanguard Total Stock Admiral (VTSAX)

His 401k
20.9%% Vanguard Total Bond Market Index Inst Plus (VBMPX)
2.7% Company Stock shares
5.3% Vanguard Institutional Index (VIIIX)

His Roth IRA at Vanguard
18.7% Vanguard Total International Stock Admiral (VTIAX)
23.6%% Vanguard Total Stock Admiral (VTSAX)

Total of All Accounts Together (not each account individually) should equal 100%.

Contributions

New annual Contributions
$0 his 401k-not an option
$0 his IRA/Roth IRA-not an option
$0-55K taxable depending on decision

Questions:
1. As I mentioned, I love where I live and would like to stay here and gain residency. There is a savings scheme where I can reduce my tax burden by 40K per year but the savings must be used to purchase real estate. The caveat is mortgages are roughly 10%. My thought is purchasing a home between 200K-350K and carry a mortgage between 70-200K, depending on the home I would purchase. In addition, I would pay the home down with all extra income I receive and it would be completely paid off in 2-3.5 years. In this situation, I would send nothing back to the US for retirement funds during this time. But, I would have the flexibility to not overpay on the mortgage in the event that exchange rates improve or if the market crashes I could send money back to buy more US based funds. I feel relatively comfortable about the growth of the country, but as with any developing economy it could crash at anytime. I would not touch any of my funds held in the US because I am taxed on worldwide income in my local market. In a way, this would serve as my retirement contributions over the next two to three years. There is not capital gain taxes on the sales of real estate in the home country and I would be subject to taxes in the US based on standard real estate taxation norms. Once the home is paid off, I would send all leftover savings to Vanguard in my taxable account.

2. The other option is to save into the tax advantaged account for real estate and wait until I can pay completely in cash in a few years. If I do this, I have to keep paying rent. If I choose to pull all of the money out of this account without purchasing a home, I just have to pay the 34% tax rate that I am already paying. There is no earned interest in this account so it will be subject to inflation, which is currently around 4%. The leftover assets would be sent back to the US to put in my taxable account.

3. The other option is to just keep renting (roughly 1500 USD a month) and sending money home (4500 USD/month) but continue with the large tax burden.

4. I know the idea is to just keep putting money in, but I do not believe this is the wisest choice given the circumstance that I am facing.

Thanks for any insight on this. Reading this site has provided a lot of useful information.
Regards,
James

AlohaJoe
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Joined: Mon Nov 26, 2007 2:00 pm
Location: Saigon, Vietnam

Re: Portfolio analysis with home purchase-Outside the US

Post by AlohaJoe » Tue Oct 31, 2017 5:02 am

Your plans seem all a bit confused to me. As in: what's your primary goal?

Say you put $40,000 next year into that special fund. That saves you $10,000 one time in your life. I mean, $10,000 isn't nothing but it is still just a one-off windfall that is less than 20% of what you save every year anyway. If the goal is "I'm paying way too much tax and want to find a way to lower it" ... this option doesn't make much sense. However, if the real goal is "I want to own a house to hedge inflation where I live" then buying after 1 year seems fine.

Since you say you can pay off the mortgage in 2-3.5 years, I guess the question is -- do you have a burning desire/need to buy now? Waiting 2 years isn't that much. A side benefit would be 2-4 more years of that tax break. But the tax thing is still very short-term. After 2 years you'll be back to paying the full amount of taxes.

I wouldn't worry too much about the 10% interest rate. Americans used to have rates like that and people still bought houses. You seem to be able to pay it off quickly. But it means the question becomes: do you want to pay $30,000 in interest in order to buy 2 years sooner?

I don't know enough about your personal situation or the country in question to offer any advice on that question.

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in_reality
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Re: Portfolio analysis with home purchase-Outside the US

Post by in_reality » Tue Oct 31, 2017 6:00 am

avlfutbol wrote:
Mon Oct 30, 2017 10:07 pm

Tax Rate: 25% Federal US, NA% State; 34% home country so should never pay US taxes, no tax treaty

$0 his IRA/Roth IRA-not an option
Help me understand why you are IRA/ROTH ineligible?

If your home country tax rate is truly higher, that means you can declare your foreign income on your tax return, pay US taxes on it but claim a dollar for dollar credit for the foreign taxes already paid. Again, if you are paying more in foreign taxes than you would in the US, you should never have to pay US taxes on your foreign income.

However, doing so would give you earned US income and make you eligible for IRA/ROTH contributions (subject to normal ROTH Income Limits of course).

I haven't really considered whether or not it makes sense to try a back door ROTH, or even if it makes sense to use an IRA if it doesn't actually reduce your taxed because it'll be taxed at normal rates coming out.

Anyway, if you declare your foreign income and then take a foreign tax credit, you will have US earned income because that income is declared as taxable on your return.

Also, your statement about never paying US taxes may not be right. You may have to pay US taxes on interest, dividends or capital gains. The foreign tax credit can not offset those.

I found turbo tax to be helpful on this.

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in_reality
Posts: 4274
Joined: Fri Jul 12, 2013 6:13 am

Re: Portfolio analysis with home purchase-Outside the US

Post by in_reality » Tue Oct 31, 2017 6:11 am

avlfutbol wrote:
Mon Oct 30, 2017 10:07 pm
My thought is purchasing a home between 200K-350K and carry a mortgage between 70-200K, depending on the home I would purchase. In addition, I would pay the home down with all extra income I receive and it would be completely paid off in 2-3.5 years. In this situation, I would send nothing back to the US for retirement funds during this time. But, I would have the flexibility to not overpay on the mortgage in the event that exchange rates improve or if the market crashes I could send money back to buy more US based funds. I feel relatively comfortable about the growth of the country, but as with any developing economy it could crash at anytime. I would not touch any of my funds held in the US because I am taxed on worldwide income in my local market. In a way, this would serve as my retirement contributions over the next two to three years.
OK, but keep in mind that you are making your retirement contributions in that foreign currency. Homes are not bought in USD are they?

So if there is an economic collapse, and you lose your job, the valuation of the home will likely drop a lot too. If you decided to leave, you might be selling at a currency low.

If you put your money into US stocks (or a global mix -- remember it is the stock that gives your currency exposure so if you buy a total international stock fund in USD, your currency exposure is the mix of stocks and not USD) and the local economy crashes, the USD and other haven currencies will likely be much stronger. Again I haven't done the math there, but having stronger currencies in a crash will offset the cost of having to exchange it back into the local currency to spend.

I am not giving advice about what to do. Just thoughts on currency to consider.

avlfutbol
Posts: 15
Joined: Fri Apr 17, 2015 11:44 pm

Re: Portfolio analysis with home purchase-Outside the US

Post by avlfutbol » Tue Oct 31, 2017 8:02 am

Thanks for the feedback. A little more information below.
AlohaJoe wrote:
Tue Oct 31, 2017 5:02 am
Your plans seem all a bit confused to me. As in: what's your primary goal?

Say you put $40,000 next year into that special fund. That saves you $10,000 one time in your life. I mean, $10,000 isn't nothing but it is still just a one-off windfall that is less than 20% of what you save every year anyway. If the goal is "I'm paying way too much tax and want to find a way to lower it" ... this option doesn't make much sense. However, if the real goal is "I want to own a house to hedge inflation where I live" then buying after 1 year seems fine.The goal is to have a place that is always mine where if I do lose my current job, I can accept something at a much lower salary and be fine. Or start my own business, which I have been thinking about for the last five years. I just need more time to build relationships in my current industry. Second goal would be to profit off of the real estate.

Since you say you can pay off the mortgage in 2-3.5 years, I guess the question is -- do you have a burning desire/need to buy now? Waiting 2 years isn't that much. A side benefit would be 2-4 more years of that tax break. But the tax thing is still very short-term. After 2 years you'll be back to paying the full amount of taxes. It would not be a one time 10K savings, I can contribute every year.
Even after I purchase and own, I could continue saving and buy other properties (beach, mountain home, Medellin where the cost is about half of the capital city). Part of my monthly payment would always be tax deductible.


I wouldn't worry too much about the 10% interest rate. Americans used to have rates like that and people still bought houses. You seem to be able to pay it off quickly. But it means the question becomes: do you want to pay $30,000 in interest in order to buy 2 years sooner? My father said the same thing. I guess it is a shock factor of 10%. My interest on the home purchase would be less than the cost of renting, I suppose I am just justifying buying the house.

I don't know enough about your personal situation or the country in question to offer any advice on that question.
Country is Colombia. Work in a major industry that is not too damaged by market crashes and I seem to find opportunities with ease with the large global players with ease, however the contract is always local. I am not at the top of the foodchain to get the lavish expat packages and I am okay with that for now.

Good points. It may make more sense just to keep maxing out a real estate savings account and just avoid instant gratification and with the leftovers send back to my taxable account.

avlfutbol
Posts: 15
Joined: Fri Apr 17, 2015 11:44 pm

Re: Portfolio analysis with home purchase-Outside the US

Post by avlfutbol » Tue Oct 31, 2017 8:13 am

[/quote]

Help me understand why you are IRA/ROTH ineligible? I exceed the income limit. However, a backdoor Roth contribution is not something that I have thought about. I need to do some reading to understand how all of that works.

If your home country tax rate is truly higher, that means you can declare your foreign income on your tax return, pay US taxes on it but claim a dollar for dollar credit for the foreign taxes already paid. Again, if you are paying more in foreign taxes than you would in the US, you should never have to pay US taxes on your foreign income.

However, doing so would give you earned US income and make you eligible for IRA/ROTH contributions (subject to normal ROTH Income Limits of course).

I haven't really considered whether or not it makes sense to try a back door ROTH, or even if it makes sense to use an IRA if it doesn't actually reduce your taxed because it'll be taxed at normal rates coming out.

Anyway, if you declare your foreign income and then take a foreign tax credit, you will have US earned income because that income is declared as taxable on your return.

Also, your statement about never paying US taxes may not be right. You may have to pay US taxes on interest, dividends or capital gains. The foreign tax credit can not offset those.Agreed and I have structured my retirement accts so that I have minimal taxable events.
Hence why I still have a portion in VEMAX. I do not want to move it because i pay taxes on worldwide income.


I found turbo tax to be helpful on this.
[/quote]

PWC did my taxes last year and they were less than helpful in explaining any of this. They kept passing the buck and could never clarify anything. I should look to see where i can educate myself more in regards to foreign tax credits and using that as a backdoor Roth option. Thanks.

avlfutbol
Posts: 15
Joined: Fri Apr 17, 2015 11:44 pm

Re: Portfolio analysis with home purchase-Outside the US

Post by avlfutbol » Tue Oct 31, 2017 8:17 am

[/quote]

OK, but keep in mind that you are making your retirement contributions in that foreign currency. Homes are not bought in USD are they?

So if there is an economic collapse, and you lose your job, the valuation of the home will likely drop a lot too. If you decided to leave, you might be selling at a currency low.

If you put your money into US stocks (or a global mix -- remember it is the stock that gives your currency exposure so if you buy a total international stock fund in USD, your currency exposure is the mix of stocks and not USD) and the local economy crashes, the USD and other haven currencies will likely be much stronger. Again I haven't done the math there, but having stronger currencies in a crash will offset the cost of having to exchange it back into the local currency to spend.

I am not giving advice about what to do. Just thoughts on currency to consider.
[/quote]

Yes, that is the risk. The currency was devalued three years ago and things are very inexpensive here right now. Even if you gain on the currency there are taxes due to that as well. The opposite would have been true when it was 2.000:1 USD and now it is 3.000:1 USD. Thanks!

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