How Foreign Buyers Should Structure U.S. Real Estate Purchases

A foreign buyer of U.S. real estate faces a structuring question before anything else about the property itself: whose name does it go in? Directly, in the buyer's own name; through a U.S. LLC; through a foreign corporation; through a U.S. corporation owned by a foreign corporation; or through a trust. The choice is frequently made for convenience at the closing table, and it is one of the few decisions in this area that is genuinely expensive to unwind once the property is titled.

Four considerations, no structure that wins on all of them

Every structure trades against the others on four separate questions, and none of the common structures is the best answer to all four at once.

• Income tax while holding. How rental income, if any, is taxed year to year, including whether the net election under IRC §871(d) or §882(d) is available and useful.
• Tax at sale. The rate applied to gain, and the FIRPTA withholding mechanics under IRC §1445 that apply at closing.
• Estate tax exposure. What happens, from a U.S. tax standpoint, if the owner dies while holding U.S.-situs property.
• Privacy, liability, and running cost. The practical, non-tax considerations that determine how much annual attention and expense the structure requires.

The third item is the one buyers most often overlook, and the one most likely to be decisive for an expensive property held by an older owner, so it gets its own detailed treatment below.

Holding directly, in the buyer's own name

This is the cheapest and simplest option to set up. No formation cost, no annual report, no separate return unless the property is rented. Rental income, if any, is taxed under the default gross withholding rule at 30% under IRC §871(a) unless the net election under §871(d) is made; on sale, gain is taxed at the individual's own long-term capital gains rate, which for property held more than a year is generally favorable relative to corporate rates.

The exposure that direct ownership does not solve is estate tax. Under IRC §2103, U.S. real property is a U.S.-situs asset regardless of where the owner lives or holds citizenship, and IRC §2101 and §2102 apply the estate tax to that situs property on the death of a nonresident who is not a U.S. citizen. The credit available to shelter that exposure is set at IRC §2102(b)(1) at $13,000, which is the equivalent of exempting only the first $60,000 of U.S.-situs assets from tax, absent a treaty provision that increases it. That figure has not been indexed for inflation the way the exemption available to a U.S. citizen or domiciliary has been, and a single U.S. property in most major markets exceeds it many times over. The rate applied to the excess, under the estate tax rate schedule, reaches well into the double digits and climbs from there.

For a modest property, this may be a risk the owner is comfortable accepting. For a substantial property, particularly one held by an older buyer, direct ownership concentrates the single largest tax exposure on this list into the one structure that does nothing to address it.

Holding through a U.S. LLC

A U.S. LLC wholly owned by a single foreign person is, by default under Treas. Reg. §301.7701-3, disregarded for federal income tax purposes, which means the income tax result closely tracks direct ownership: the same gross withholding default on rent, the same availability of the §871(d) election, and the same individual capital gains treatment on sale, since the disregarded entity is not itself a separate taxpayer. What the LLC adds is a liability separation between the property and the owner's other assets, and, depending on the state of formation, some measure of privacy around who owns the entity on the public record.

What the LLC does not do, on its own, is solve the estate tax problem. A membership interest in a disregarded entity that holds U.S. real property is generally not treated as converting the underlying real property into something other than a U.S.-situs asset for estate tax purposes; the IRS looks through the disregarded entity to the asset it holds. A foreign buyer who titles a property in a single-member Wyoming or Delaware LLC expecting that step alone to remove estate tax exposure has generally not achieved that result.

A U.S. LLC that elects to be taxed as a corporation, or a U.S. corporation formed to hold the property directly, is a different calculation. Income is taxed at the flat federal corporate rate under IRC §11, currently 21%, gain on sale does not receive the favorable individual long-term capital gains rate, and distributing profits out of the corporation to the foreign owner generally triggers a further 30% FDAP withholding on the dividend under IRC §881 and §1442, unless a treaty applies and reduces that rate. A U.S. corporation solves none of the estate tax exposure either, since shares of a domestic corporation are themselves treated as U.S.-situs property under IRC §2104 when owned by a nonresident non-citizen.

Holding through a foreign corporation

This is the traditional structure for addressing estate tax exposure directly, because shares of a foreign corporation owned by a nonresident non-citizen are generally not U.S.-situs property in the way the underlying U.S. real estate is. The individual holds shares in an offshore entity; the offshore entity, not the individual, holds the U.S. property.

The cost shows up on the income side. A foreign corporation that owns U.S. rental property and either elects net-basis treatment under §882(d) or is otherwise engaged in a U.S. trade or business files its own U.S. corporate-style return, generally Form 1120-F, pays U.S. federal income tax at the corporate rate under IRC §11 on rental profit and on gain at sale, and can face the branch profits tax under IRC §884, a second layer of tax on the corporation's after-tax U.S. earnings before they are treated as repatriated. The structure that removes the property from the individual's taxable estate can materially increase the running and exit cost of holding it.

The combination structure: a U.S. corporation owned by a foreign corporation

For a substantial holding, a frequent answer is layering the two: a domestic "blocker" corporation holds the U.S. property directly and is, in turn, wholly owned by a foreign holding company. The individual owns shares in the foreign parent, which are not U.S.-situs assets; the foreign parent owns shares in the U.S. blocker, which files its own domestic corporate return and pays corporate-rate tax on the property's income and gain.

This combination does not eliminate FIRPTA exposure at the ultimate exit. If the buyer of a U.S. property later wants to sell the underlying real estate, the blocker corporation is very likely a U.S. real property holding corporation under IRC §897(c), meaning a sale of its stock, or a sale of the real estate it holds directly, remains subject to FIRPTA withholding under §1445 in substantially the same way a direct sale would be. The structure is generally justified by the estate tax exposure it removes, not by any withholding advantage at sale, and it is more expensive to maintain year to year than either single-layer alternative, with two sets of filings and two sets of formalities to keep current. It needs to be sized to the actual exposure, not adopted reflexively for any property above a token value.

Holding through a trust

A trust can address estate exposure and multi-generational succession together, and for a family intending to hold multiple U.S. properties across generations, a properly structured trust is sometimes the right instrument for reasons beyond tax. It is also the most complex option on this list. Whether a trust is treated as a foreign trust or a domestic trust for U.S. tax purposes turns on the control test and the court test under IRC §7701(a)(30)(E), and whether it is treated as a grantor trust, with income taxed directly to the settlor, or a non-grantor trust, taxed at the trust level, turns on separate rules including IRC §679 for a foreign settlor with U.S. beneficiaries. Getting the classification wrong, or administering the trust informally in a way that undermines the estate planning intent, such as a settlor who continues to control the property as though the trust did not exist, can defeat the entire purpose of using one.

This is the option most likely to require an estate planning attorney working directly alongside the accountant handling the U.S. tax filings, and the one where an incomplete or informally administered structure is often worse than no structure at all, because it creates the appearance of protection without the substance of it.

Why estate tax is the consideration buyers routinely miss

Every other item on this list shows up in an annual filing, a rental check, or a closing statement. Estate tax shows up exactly once, at the worst possible moment, and by definition to an estate that did not choose the structure and cannot easily fix it after the fact.

The $60,000 exemption equivalent available to a nonresident non-citizen under IRC §2102(b)(1) is a small fraction of the exemption available to a U.S. citizen or domiciliary, which runs into the millions of dollars and is adjusted annually for inflation. A single property in a major U.S. market, purchased with cash or with modest leverage, can exceed the nonresident exemption several times over on its own, well before any other U.S. assets are considered. The tax applies to the excess and is generally due before the estate can transfer clear title, which can force a sale under time pressure if liquidity was not planned for.

It is also the consideration that is cheapest to address before the purchase closes and most expensive to address afterward, because moving an already-titled property into a different structure can itself be a taxable transfer, sometimes triggering the very taxes the restructuring is meant to avoid.

What happens at the exit, regardless of structure

Every one of these structures eventually sells, and the FIRPTA withholding mechanics at IRC §1445 differ meaningfully depending on which structure is in place: who the withholding agent is, what rate applies, and how straightforward it is to apply for a reduced withholding certificate on Form 8288-B ahead of closing. A structure selected only with the holding period in mind, without asking how the eventual sale will actually work, is a structure chosen on half the available facts.

What to decide before the purchase

Three questions drive the choice more than anything else: what the property is actually worth, whether it will be rented or used personally, and how large the estate tax exposure is relative to the $60,000 exemption equivalent available to a nonresident non-citizen buyer. A buyer purchasing a modest, unleveraged property for personal use has a much narrower set of considerations than a buyer purchasing a portfolio of rental properties worth several million dollars.

Where a property has already been purchased in a structure chosen mainly for closing-day convenience, it is still worth reviewing against these four considerations, but the options available afterward are narrower and the cost of changing structure is real. That is the case for working through this analysis before the next purchase closes, rather than after the current one already has.