Foreign Investment in U.S.
Real Estate
By Barry Wen and Lu Zhang
Investing in a real estate market in another country can
be challenging. When investing in the U.S. real estate
market, there are U.S. tax considerations and certain
investment structures foreign investors should consider.
Federal Income Tax on
Operating Income
In general, foreign investors are subject to U.S. income
tax under one of two regimes: effectively connected
income (“ECI”) or passive income. ECI is generally
taxed on a net basis at regular rates applicable to U.S.
persons. U.S. source passive income (e.g., dividends, rent
and interest) is taxed on a gross basis at a 30 percent
withholding rate (or a reduced treaty rate, if applicable).
In addition, foreign corporations investing directly to
the U.S. are normally subject to U.S. branch profits tax.
Federal Income Tax on Gains
Under Foreign Investment in the U.S. Real Property Tax
Act (“FIRPTA”), if a foreign person benefits from a U.S.
real property interest (“USRPI”), it will be taxed as if it
was ECI. Additionally, when FIRPTA tax applies, the
purchaser of a USRPI is required to withhold 15 percent
of the purchase price. 1
1 USRPI includes direct interests in U.S. real property and interests in a
U.S. Real Property Holding Corporation (“USRPHC”). “In general, a
U.S. corporation is a USRPHC if the fair market value (“FMV”) of its
USRPIs is 50% or more of the total FMV of its real property and other
business assets. See Reg. Sec. 1.897-2(b).”
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BPM Real Estate Insights
U.S. Estate and Gift Taxes
High net worth foreign individuals are generally subject
to estate and gift taxes on property located in the U.S.,
including real property and tangible personal property.
The transfer by a foreign investor of an intangible
property, such as stock in a U.S. or foreign corporation,
is not subject to U.S. gift tax. However, a transfer of
stock in a U.S. corporation triggers U.S. estate tax.
Direct Investment Structure
A foreign investor may choose to invest in U.S. real estate
directly or through a single-member U.S. LLC. Under
this structure, since a U.S. LLC is generally transparent
for U.S. tax purposes, the foreign investor needs to file
U.S. income tax returns.
The downside of this structure is that, upon a tax audit,
U.S. tax authorities may examine the foreign investor’s
worldwide transactions. In addition, direct ownership of
U.S. real property is subject to both U.S. estate and gift
tax.
U.S. Blocker Structure
An investment can also be made through a U.S.
corporation, which is commonly referred to as a “U.S.
Blocker”. The U.S. Blocker is required to file corporate
income tax returns. Starting in 2018, U.S. corporations
and non-U.S. corporations with U.S. business income
(including real property income or gains) are subject to
U.S. federal corporate income tax of 21 percent (instead
of 35 percent under the prior law).
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