The Ideal Structure for Foreigners Investing in US Real Estate

US real estate is a highly attractive play for many foreign investors. For Americans, these deals usually carry only a light tax burden. If you live elsewhere, though, a few things need planning up front so your purchase doesn't end up costing you in taxes. Our founder wrote about what it felt like to buy forty-five acres of Texas land as a German in his memoir.

1US real estate: where the real returns are

On this page you'll learn how best to structure a US real estate investment as a foreigner, and what you need to think about first.

2What to consider before you buy

Before you decide to buy property in the USA as a foreigner, think a few points through in advance. The exact structure doesn't matter at the time of purchase, but with the right model you can minimize the tax burden on a later sale or similar scenarios.

Under the situs principle, income from real estate (rent, lease payments, sale proceeds and so on) is taxed where the property is located. That matters a lot for things like capital gains tax and estate tax. Americans enjoy fairly high exemptions on inheritances, while for foreign investors it gets expensive fast.

• $60,000 is the exemption for foreign investors.
• 40% applies above that.
• up to 55% is what the total tax on sale profits can reach if the investment is structured badly.

There are several options and models that make a real estate deal attractive for foreigners too. Used correctly, they ensure the most tax-efficient structure possible. They address three key considerations:

1. Taxation on sale of the property and on repatriating the profits
2. The tax bill in the event of death
3. Requirements around confidentiality and reporting

The perfect structure for your US property plans always depends on your individual situation and can vary from case to case. Personal goals, future plans and other factors play a big role. There is no universal rule you can blindly apply to everyone.

With the right planning and advice, many concerns about owning US real estate can be reduced or even eliminated entirely.

3Tax structuring options

First, a quick note: for a US real estate investment, the most tax-efficient structure for foreigners is usually the US blocker structure. This model combines a US C Corporation with a foreign holding company and, set up correctly, covers every relevant tax point. It lets you optimize capital gains on sale, minimize estate tax and avoid FIRPTA (the Foreign Investment in Real Property Tax Act, which requires withholding 10-15% of the sale price from foreign real estate investors).

In general, holding US real estate as a foreigner as an individual, through an LLC or other companies is not a good idea from a tax perspective. Below we go through the pros and cons of each structure in detail.

3.1Owning property as an individual

Of course, as an investor you can own US real estate directly as an individual. This option is the quickest and simplest to set up at the start, but in the long run it's also the most expensive. That's why very few foreigners choose it.

Not only do you have unlimited liability and no privacy, you're also subject to single-level US taxation (income tax at the federal and state level, or 30% withholding tax), possible estate tax (above $60,000, up to 40% at the federal level plus a possible further percentage depending on the state) and FIRPTA.

If the property is rented out, the owner must file a US tax return on their US income. Under this structure, the owner is also personally liable for any damage arising from the rental.

When selling the property under this option, foreigners are subject to FIRPTA. As a rule, 15% of the total sale price is due; only on a sale of up to $300,000 to a buyer who will live in the property is there no withholding. This amount is withheld and counts as a prepayment to the IRS. When you file your tax return, it is credited against your income tax.

Things get very complicated if you rent out the property. The rental income counts as passive income. As a foreigner, you pay 30% tax on it (with no deductions), which the tenant must withhold. If you're involved in the rental directly, for example through management or similar, the income, combined with a US company, can be treated as business income. It is then taxed at an income tax rate of up to 37%. In return, deductions can be claimed.

As a foreign private owner, you're also subject to estate tax. On your death, it amounts to up to 40% at the federal level on all property worth more than $60,000. On top of that come further taxes that vary by state.

3.2Owning property through a company

Here we need to look at several different company types and their pros and cons.

Limited Liability Company

For foreigners, buying real estate through an LLC is similar from a tax perspective in many ways to buying as an individual. However, it offers advantages when it comes to personal liability and potential losses, since the investor's personal assets are protected.

That can make it an attractive structure, especially for smaller investors. With an LLC you personally have reporting obligations to the IRS, but you're not liable and your privacy is protected. What stays the same as with the first option: income tax at the federal and state level, or 30% withholding tax, estate tax (above $60,000, up to 40% at the federal level plus a possible further percentage depending on the state) and FIRPTA.

So while an LLC can be a good option for your privacy, it doesn't protect you from estate tax. On the other taxes, this option isn't much different from buying as an individual.

US Corporation

With a US corporation, the foreign investor benefits from liability protection and doesn't have to file a US tax return personally. Beyond that, though, this option is usually not recommended: it doesn't solve the estate tax problem and even adds extra taxes.

With this structure, your privacy is protected to a degree, as are your personal assets. On estate tax, the US corporation brings no advantages, because the shares count toward the investor's estate. FIRPTA no longer applies, but capital gains tax goes up. On top come a corporate tax of 21% and flat taxation of dividends and profit distributions.

Foreign company

Be careful when investing in US real estate through a foreign company. You pay not only US corporate tax but also the branch profits tax, a 30% tax on distributions of US income (whether actually distributed or not).

A foreign company gives you privacy, shields you from personal liability and means you pay no estate tax. In return, you are subject to corporate income tax and the 30% branch profits tax, which applies on top of the regular income tax and, calculated on the actual business profits, can add up to as much as 55%. FIRPTA only falls away if you sell shares in the foreign company itself rather than the property. With all these factors, avoiding estate tax is only a limited advantage, which makes this option not really one we recommend.

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3.3The US blocker structure

For foreign investors buying property, this structure is arguably the best option from a tax perspective. Set up correctly, a blocker structure brings your total tax burden down to 25%. It combines a US C Corporation with a foreign company. You get privacy and liability protection, and with the right planning you also avoid FIRPTA and estate tax. Depending on your country of residence, income tax may fall away as well. When the property is sold, the corporation pays 21% corporate tax on the gain; corporations get no reduced rate for capital gains.

The foreign holding company acts as the parent company of the US corporation. If you observe a 5-year waiting period after the property sale, all profits can be paid out completely tax-free to the foreign holding. Distribute earlier and a withholding tax of between 5 and 30% applies. Depending on where the foreign company is based, this tax can be reduced to 5 or 10% (in the UK, for example).

Mount Bonnell Advisors will gladly handle the setup of this blocker structure for you. We usually choose companies in countries that have a tax treaty with the US, as the UK does.

Learn more about the US blocker structure →

There are of course other ways to optimize your taxes, such as a US company that pays a salary to founders living abroad. We are happy to find the best route for you from a tax perspective. To learn more, read our article on taking profits out of a US corporation.

If you are unsure which option suits your plans, our tax team is ready to help. We have years of hands-on experience with the different US entity types and support you all the way, from choosing the right structure to forming the company if needed.

4What this means for your US property purchase

Before buying property in the US, foreigners should always find out which structure is right for the deal. Otherwise an investment can quickly bring unwanted tax disadvantages that the right structure would have avoided.

Our tax team brings valuable experience in this field and will gladly help you find the best option for you personally. We also advise you on key questions such as choosing the best state, forming a company and anything else that comes up. Just book a consultation and take a big step closer to a profitable property investment in the USA.

In short

• Income from US property is taxed in the US, where the property is located.
• For foreign investors, the US estate tax exemption is $60,000; above that, federal tax of up to 40 percent applies.
• Owning directly or through an LLC protects you from neither estate tax nor FIRPTA. An LLC does, however, offer liability protection and privacy.
• A US corporation on its own does not solve the estate tax problem, and a foreign company brings the 30 percent branch profits tax with it.
• The US blocker is generally the best structure for tax purposes: a US C Corporation under a foreign holding company.

Frequently asked questions

Which structure is best for foreigners buying US property?

Usually the US blocker structure. A US C Corporation holds the property, and a foreign holding company holds its shares. Set up correctly, it covers the sale, inheritance and FIRPTA. Which setup suits you always depends on your goals and plans. More on the US blocker for real estate.

How high is US estate tax for foreign owners?

For investors who do not live in the US, the exemption is $60,000. Above that, federal tax of around 40 percent applies, and some states add their own taxes. Full details: US estate tax for non-US citizens.

Does an LLC protect against US estate tax?

No. An LLC protects your personal assets from liability claims and protects your privacy. For tax purposes, it is barely different from buying as an individual: income tax, estate tax and FIRPTA all still apply.

What is FIRPTA?

The Foreign Investment in Real Property Tax Act. When a foreigner sells US property, the buyer withholds part of the sale price and pays it to the IRS. The amount counts as a prepayment and is credited against income tax on the tax return.

Why is a foreign company on its own not a good solution?

It pays no US estate tax, but it is subject to US corporate tax plus the 30 percent branch profits tax on its US income, whether that income is distributed or not.

Do I need to file a US tax return if I rent out US property?

Yes. If you rent out US property as an individual, you must file a US tax return on your US income. Our article on taxes for US property owners shows what that looks like in practice.

How we help you

• US blocker for real estateBuying US property through a US C Corporation with a UK holding company.
• Form a CorporationThe US corporation (Inc) for growth, investors and your visa.
• Corporation tax returnForm 1120 and Form 5472 for your US corporation.
• ConsultationOne hour with the firm: your case, your questions, a clear answer.