Foreign Investment in U.S. Real Estate Tax Act | PBMares (2024)

• View Larger Image

By Lynn Eller, CPA, APCIT, PFS

FIRPTA Considerations

The Foreign Investment in Real Property Tax Act (“FIRPTA”) authorizes the U.S. to tax foreign persons on the disposition of U.S. real property interests.

The purchaser of the real estate from the foreign person is generally required to withhold 15% (10% if under certain thresholds) of the gross sale proceeds and remit to the IRS. The withholding on the gross proceeds typically creates a requirement for the foreign person to file a U.S. tax return to obtain a refund.

U.S. Estate and Gift Tax Considerations

Individuals that are not domicile in the U.S. may still be subject to U.S. estate or gift tax on their investments in U.S. real property. In 2024, the estate tax exemption for foreign nationals is just $60,000 and annual gift tax exclusion per non-spouse recipient is $18,000. The estate and gift tax rates currently range from 18% – 40% on the value of the property.

Individual vs. Entity Ownership Structures

When it comes to determining optimal ownership structure for foreign investment in U.S. real estate, there is no “one-size-fits-all” approach.

Some common ownership structures include the following:

• Foreign individual (FI) directly own US real property (USRP)
• FI owns a US LLC that owns the USRP
• FI owns a US Corporation (USCo) that owns the USRP
• FI owns a Foreign Corporation (ForCo) that owns the USRP
• FI owns a ForCo that owns USCo that owns the USRP: the “Corporate Sandwich”.
• Finally, there are structures with trusts and insurance products that can be beneficial.

The following are some factors that the foreign investor should evaluate:

• Privacy concerns
• Liability protection
• Level of personal use of property
• Volume of U.S. real estate activity and length of investments
• S. gift and estate tax related to real property
• Application of income tax treaty benefits
• Types of income expected to be generated
• Plans for repatriating earnings
• Avoidance of FIRPTA

The advantages of individual ownership include reduced number of tax filings; total control by individual; and long-term capital gains tax rate of 20 percent (plus state rate) if held more than 12 months.

The disadvantages of individual ownership include no U.S. estate or gift tax protection; FIRPTA withholding; no privacy as name is listed on land register; rental income subject to tax rates up to 37% (although depreciation deductions often minimize); and foreign individual files a U.S. non-resident tax return.

The advantages and disadvantages of entity ownership will vary depending on the type of entity structure (US LLC, USCo, ForCo, both USCo and ForCo, or Trust or Insurance Products).

Generally, if the foreign investor determines any of the following goals are a priority, then one of these entity structures may be optimal:

• Privacy
• Liability protection
• Estate and gift tax protection
• Lower 21% (plus state) corporate tax rate for both rent and gain on sale.
• FIRPTA avoidance when a ForCo is inserted.

Learn More

For every situation and unique set of circ*mstances, the optimal structure for foreign investment in U.S. real estate will vary.

The PBMares tax team can help you assess various considerations, model the tax impacts of the various holding structures, and, ultimately, provide a recommendation on the right structure for your particular investment.

Contact us today to learn more.

ABOUT THE AUTHOR(S):

The content of this post is accurate as of the date below. Always ensure you are reviewing the most recent information available. Contact your tax advisor if you need clarification.

SHARE THIS POST: