When one applies for a mortgage in Bermuda, the local banking concept was to develop a relationship with that customer that carried on throughout the life of the mortgage. And until fairly recently, that is, until competition heated up, it was untraditional to find customers transferring mortgages from one local institution to another. This was the way it was in a small, small closed economy.

The United States mortgage market is completely different. In 2002 alone, $600 billion in new residential mortgages were issued.

In most cases, not one conforming mortgage is left at the home town bank. Instead, they are bundled into mortgage pools and sold as mortgage-backed securities to investors on the open market.

This creates tremendous liquidity in the market assuring that there is always mortgage money available to lend, instead of being tied up in non-marketable property, for instance.

But it also creates an enormously large paper trail, part of which comes under due diligence by the lenders, legal teams, title insurance companies, and realtors, in assuring that not only can the mortgages be tracked, but that the actual purchase and sale of the property be carefully recorded at the local registrar of deeds.

You can't lay claim to an asset in a default if you can't find it, now can you?

Non-conforming loans are issued at much higher rates to clients who don't fit the pattern, for one reason or another.

The loan may be jumbo sized, or you are a non-resident alien purchasing an investment property abroad.

Whatever the category you fall into, it is a sure bet that your purchase (and subsequent sale) will cost more than the average, but be just as carefully documented. And for other very good reasons. Financial decisions of any kind in the US have ripple effects throughout the entire infrastructure: The owner of real estate may claim mortgage interest expense on his/her annual tax return; the mortgage-back security investor must report gains (and losses) as well.

Legal and Estate Planning Issues

How will you hold this real estate deed? Are you the sole owner or is there more than one owner? If there is more than one owner, are you a tenant in common or a joint owner or (if married) a tenant by the entirety? Do you need the consent of another individual to sell the property?

The form of ownership that you have in a piece of property determines what you can do with it, how the property will be taxed, and what will happen when you die ? whether the property will be transferred to your spouse, children, a joint owner, and/or other heirs at law.

The decision that you make impacts not only your tax reporting requirements but your estate planning as well. In general, some aspects of legal titling are the same.

Hold the property jointly; your undivided share passes at your death to the other joint holder. Tenants-in-common interests pass downward to each tenant's beneficiaries, not to the other holders.

You can sell your tenant in common or joint interest without consulting anyone, but you need permission in a joint tenancy by the entirety (married couples only).

The concept of community property muddies the waters even further. Should you hold the real estate in a corporation? If you rent the property, it could be more easily construed that you are operating a for-profit US real property holding company with US source income. How do you dispose of foreign corporation stock? More complex issues can follow, such as, what happens to all of your US assets if you pass prematurely.

The US federal and state estate tax laws are punitive to non-resident aliens (NRA) upon passing.

While a US citizen's estate is entitled to an exemption of $2 million (and rising), the NRA is granted a mere $60,000. And just about all assets owned in the US are included in an estate tax filing: stocks, bonds, real estate, mutual funds, cars, boats, etc, the list is fairly long.

Property held between spouses in Bermuda in joint name is generally protected from stamp duty at death. A common misconception is that the same rule applies in the US.

Not so. Assets transferred by matter of law may bypass the US probate process, but it will not circumvent estate tax filings.

Typically, the NRA does not have a US will and as is human nature, something falls through the cracks that must go through probate, negating the planning process.

The process can be onerous and very expensive. In a recent case, real estate valued at $300,000 saw a final tax bill in excess of $42,000.

A few years ago, a rather wealthy Bermudian passed leaving significant assets (and outside the will beneficiaries) ? the case dragged on for years. Only two groups gained: Uncle Sam and the law firms.

Rental Income ? is it worth it?

In most areas of the country, you can't command Bermuda rents. In fact, real estate investment returns focus on owning at least four units, just to break even.

Certainly, you hope for capital appreciation down the road. Holding or renting as an absentee landlord has other impacts.

What do you do long-distance about problem tenants, inept management companies, declining real estate values that you may not immediately perceive, tax issues and returns, and adequate funds to maintain liquidity when your unit is empty?

In my years of financial practice in the US, I never saw anything less than four to six units break even. A housing/rental slump can precipitate foreclosures around you and a general downturn in tenant quality.

Space does not permit me to assess these issues further. You probably are best off to keep the property just for your own use, and to really research the area before you buy.

I generally recommend that if you are serious about foreign real estate ownership that you consult a tax / legal expert who is licensedto practice in that country, as well demonstrating extensive experience in these areas.

A good place to start is with one of the Big Four accounting / tax firms or large regional firms.

Tax laws are continually updated and changed. It is never a good idea to use someone else's methodology that may have worked for them years ago. And it is wise to remember that all transactions by a foreign person(s) may face increased scrutiny simply because the world is the way it is today. Operate with good faith and you will stay in good faith.

Martha Harris Myron CPA/PFS CFP? is a VP and Senior Private Banker, Bank of Bermuda Member HSBC Group. She specialises in providing comprehensive financial solutions for individuals and their families.

She can be reached at 299-5578 Confidential email can be directed to marthamyron@northrock.bm

The article expresses the opinion of the author alone. Under no circumstances is the content of this article to be taken as specific individual investment advice, nor as a recommendation to buy/ sell any investment product. The Editor of the Royal Gazette has final right of approval over headlines, content, and length/brevity of article.