Structuring Real Estate Investments in the U.S. for Foreign Buyers: FIRPTA and Beyond

Why U.S. real estate is uniquely complex for foreign investors

The United States is one of the most attractive real estate markets in the world for foreign investors — offering relative political stability, legal protections, and deep liquidity. But U.S. real estate investment by foreign persons is subject to a web of tax rules that can significantly affect the after-tax return: the Foreign Investment in Real Property Tax Act (FIRPTA), U.S. estate tax on U.S.-situs assets, income tax on rental income and capital gains, and branch profits tax for certain corporate structures. Thoughtful structuring before acquisition — not after — is essential to managing these exposures.

FIRPTA: withholding on disposition of U.S. real property interests

FIRPTA, enacted in 1980, subjects foreign persons to U.S. income tax on gain from the disposition of U.S. real property interests (USRPIs). To enforce collection, FIRPTA requires the buyer to withhold a percentage of the gross sales price and remit it to the IRS at closing. The standard withholding rate is 15% of the gross sales price — not 15% of the gain. For a property with significant debt or modest appreciation, the withholding can exceed the actual tax liability, requiring the foreign seller to file a U.S. tax return to claim a refund of excess withholding.

FIRPTA applies not only to direct sales of real property but also to dispositions of interests in entities that qualify as U.S. real property holding corporations (USRPHCs) — corporations in which U.S. real property interests constitute 50% or more of assets. This means that a foreign person selling stock in a U.S. corporation that primarily holds real estate is subject to FIRPTA on the stock sale, not just on direct property sales.

Structuring to manage FIRPTA exposure

Several structures can mitigate FIRPTA exposure for foreign real estate investors. Holding U.S. real estate through a foreign corporation converts the U.S. real property interest into foreign corporate stock — which is not itself a USRPI. When the foreign investor sells the foreign corporation's shares, the sale is not subject to FIRPTA withholding. However, this structure triggers the branch profits tax (a 30% tax on earnings repatriated from a U.S. branch of a foreign corporation) and the U.S. estate tax analysis changes: foreign stock is not a U.S.-situs asset for estate tax purposes, eliminating the estate tax exposure that a direct property holding would create.

Domestic structures — U.S. LLCs or C corporations — are also commonly used. A U.S. C corporation holding real property eliminates the estate tax exposure for the non-resident alien shareholder (whose shares in a foreign corporation are not U.S.-situs assets) but does not eliminate FIRPTA: shares in a U.S. real property holding corporation are treated as USRPIs under FIRPTA. Each structure involves trade-offs among FIRPTA, estate tax, income tax, and branch profits tax that must be evaluated together.

Income tax on rental income and gains

Foreign persons who own U.S. rental real estate are subject to U.S. income tax on net rental income. Without an election, U.S.-source rental income of a non-resident alien is subject to 30% gross withholding — no deductions allowed. Making the Section 871(d) election allows the foreign investor to treat the rental income as effectively connected with a U.S. trade or business, permitting deductions for depreciation, mortgage interest, property taxes, and other expenses, with net income taxed at graduated rates. This election almost always produces a lower effective tax rate than the gross withholding regime.

Estate tax: the $60,000 exemption problem

As discussed elsewhere, non-resident aliens who own U.S. real estate directly at death face U.S. estate tax on its full fair market value with only a $60,000 exemption. Holding U.S. real estate in a foreign corporation or through a properly structured domestic entity can convert the U.S.-situs asset into a non-U.S.-situs asset — removing it from the U.S. taxable estate entirely. This remains one of the most important reasons to structure U.S. real estate ownership carefully before acquisition.

Foreign investment in U.S. real estate requires careful upfront structuring to manage FIRPTA, estate tax, income tax, and branch profits tax exposure. Our international private client attorneys advise foreign investors on acquisition structures, ongoing compliance, and exit planning. Contact us before your next U.S. real estate transaction.