Feeling pinch back home, U.S. retirees pursue the American Dream abroad
"There are always tax issues when it comes to retiring abroad. U.S. citizens can never escape the tax man."
Retiring abroad can also create certain headaches when it comes to estate taxes. Married couples, for instance, may find that they don't qualify for the $5 million federal estate-tax exclusion in the U.S. if one of them is a non-resident or a citizen of another country.
What's more, countries have different regulations when it comes to estates and taxation of retirement-account earnings. Experts say it behooves American expats to seek professional advice on taxes and inheritance rules in their adopted countries. They might also want to draft wills or trusts locally, because some countries don't recognize certain U.S. legal documents.
In order to minimize their U.S. tax burden and the hassles associated with disputing taxes from abroad, some retirees actually establish residence in no- or low-tax U.S. states—by voting there, obtaining a driver's license or filing a partial-year return, among other tactics—prior to moving.
"There are always tax issues when it comes to retiring abroad. U.S. citizens can never escape the tax man," said Tom Zachystal, a certified financial planner and founder and president of Individual Asset Management, which specializes in investment management and financial planning for American expats.
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Real estate pitfalls abroad
If retirees opt to buy rather than rent property abroad, they may have their work cut out for them. Many foreign-property markets are a lot less transparent than their U.S. equivalent and thinly traded, especially for the types of high-end homes many foreign retirees tend to prefer. A beachfront condo that seems like a bargain by American standards may be very difficult to resell, given the limited pool of potential buyers for such property in many foreign locales.
"The kinds of checks and balances that we have in the U.S. often don't exist in other countries in terms of real estate purchases," said Stevens, who advises American buyers to seek legal representation from English-speaking local attorneys. Buyers should also ensure that their lawyers don't also represent sellers, a practice that is common in many foreign countries and can create conflicts of interest, she said.
In many foreign markets, particularly in parts of Latin America, real estate is commonly held inside corporations or trusts, which creates tax-compliance issues for Americans living abroad. Foreigners who fall in love with beachfront properties in Mexico have long had to use real estate trusts to buy them, because the country prohibits non-Mexicans from directly owning land within 31 miles of the coast and 62 miles of the nation's borders.
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"The minute you buy real estate inside a corporation, it becomes a reportable event and must be shown on your U.S. tax return," said Hodges.
Many Americans try their hand at retiring abroad and decide it is not for them. Many others are quite content in their adopted countries, although some concede that the adjustment period can be rough.
"You come here with your Type A brain and certain expectations" about the way things ought to work, said Staton. "But you have to learn to go with the flow or go home."
Others caution that Americans should not retire abroad strictly for financial reasons. "The joy of going overseas is the adventure and the beautiful scenery," said Hodges. "If those are not the things that attract you, you'd be better off in the States."
"If you want to live cheaply, go visit the South in the U.S., where they speak English and you can shop at Wal-Mart," he said.
—Anna Robaton, Special to CNBC.com