US Real Estate for Non-Resident Investors
Rental income taxation, FIRPTA withholding on sales, estate tax exposure, and the ownership structures that protect your investment. Every decision — from entity selection to exit strategy — has long-term consequences. We help you get it right from day one.
James Baker CPA explains the critical tax rules every non-resident real estate investor needs to understand
Why US Real Estate Is the Most Complex Asset Class for Non-Residents
Real estate is the one asset class where the United States taxes non-resident aliens on virtually everything — the rental income, the capital gains on sale, and even the transfer at death. This stands in stark contrast to stocks, where non-residents enjoy a complete exemption from capital gains tax, or bank interest, which is entirely exempt from US taxation. When a non-resident alien invests in US real property, they step into a regulatory framework that was specifically designed to ensure foreign investors cannot escape US taxation: the Foreign Investment in Real Property Tax Act (FIRPTA), enacted in 1980.
But here is the critical insight that most CPAs miss: there is no one-size-fits-all answer for non-resident real estate investors. The correct tax strategy depends entirely on the investor's specific circumstances. When we work with clients, we conduct a comprehensive Expansion Ecosystem Analysis that evaluates every factor before recommending a structure or approach.
Every Strategy Starts With Your Specific Situation
The advice we give a 30-year-old Canadian buying a short-term rental in Miami is fundamentally different from the advice we give a 65-year-old UAE national building a commercial real estate portfolio in Texas. The key factors we analyze include:
- 1.Where you are a tax resident — Your home country's tax treaty with the US (or lack thereof) fundamentally changes the estate tax exposure, withholding rates, and available exemptions.
- 2.How much you are investing — A $300,000 condo requires a completely different structure than a $3 million portfolio. The cost of corporate structures must be justified by the tax savings.
- 3.Your age and estate planning needs — The US estate tax applies at death, with only a $60,000 exemption for non-residents. A younger investor may accept the risk; an older investor cannot afford to.
- 4.How you will use the property — Short-term rental (Airbnb), long-term rental, buy-and-hold appreciation, or fix-and-flip. Each strategy triggers different tax rules, deduction opportunities, and filing requirements.
- 5.Your ownership structure goals — Whether you want simplicity (personal ownership), liability protection (LLC), or full estate tax shielding (corporation with foreign blocker). Each layer adds cost but removes risk.
- 6.Where you want to live in the future — If you plan to eventually move to the US, the structure you choose today must account for the transition from non-resident to resident status without triggering unnecessary tax events.
All of these factors are subject to US taxation — but the goals and objectives of the client determine the advice that we give. This is why we conduct dozens of these reviews every month, often on video with clients walking through their specific scenarios. You can watch many of these reviews on our YouTube channel, where we break down real client situations and explain the reasoning behind each recommendation.
The guide below walks through the general framework — the three layers of tax, the key elections, and the ownership structures available. But remember: the right answer for your situation depends on all of the factors above, analyzed together.
The Three Tax Layers Every Non-Resident Real Estate Investor Faces
Layer 1 — Rental Income Tax: By default, the IRS taxes gross rental income at a flat 30% with no deductions. A property generating $60,000 in annual rent owes $18,000 in tax — even if expenses consume $50,000 of that income. The §871(d) election changes this to net income at graduated rates, potentially reducing the tax to under $2,000. However, if the property is held through a US C-Corporation, the rental income is taxed at the corporate level at a flat 21% on net income — a more predictable and often more favorable outcome.
Layer 2 — Capital Gains Tax (FIRPTA): When a foreign person sells US real property, the buyer must withhold 15% of the gross sale price under FIRPTA. On a $1 million sale, that is $150,000 held by the IRS regardless of whether your actual gain is $50,000 or $500,000. Critically, FIRPTA only applies when the seller is a foreign person or a foreign-owned LLC. If the property is held through a US C-Corporation, the seller is a domestic entity — and FIRPTA does not apply. This is one of the most important structural advantages of using a corporation.
Layer 3 — Estate Tax: If you die while owning US real property personally or through an LLC, the IRS imposes estate tax on the property's fair market value. Non-resident aliens receive only a $60,000 exemption — compared to $13.61 million for US citizens. On a $1 million property, the estate tax can exceed $345,000. A US C-Corporation (especially one owned by a foreign holding company) eliminates this exposure entirely, because the investor owns corporate stock rather than US real property.
The impact of each layer depends heavily on how the investment is structured. Personal ownership and LLC ownership expose the investor to all three layers. A US C-Corporation with proper structuring can eliminate Layers 2 and 3 entirely while providing a more predictable outcome for Layer 1.
FIRPTA: The 15% Withholding That Shocks Most Foreign Sellers
Critical: When Does FIRPTA Apply?
FIRPTA applies when the seller is a foreign person — this includes non-resident alien individuals and foreign-owned single-member LLCs (which are disregarded entities, meaning the IRS looks through the LLC to the foreign individual owner). Multi-member LLCs taxed as partnerships are also subject to FIRPTA withholding on the foreign partners' shares.
FIRPTA does NOT apply when the seller is a US corporation. Because a US C-Corporation is a domestic entity, it is not a "foreign person" under IRC §897. This means that if you hold your US real estate through a US C-Corporation, the sale of the property by the corporation is not subject to FIRPTA withholding. This is one of the most significant structural advantages of using a corporate structure for non-resident real estate investment — and it is the primary reason we often recommend corporations for larger portfolios.
The Foreign Investment in Real Property Tax Act, universally known as FIRPTA, is codified in IRC §897 and represents the US government's primary mechanism for ensuring that foreign persons pay tax on gains from US real estate dispositions. The core rule is deceptively simple: when a foreign person sells US real property, the buyer must withhold 15% of the gross sale price and remit it to the IRS using Form 8288 within 20 days of closing.
The word "gross" is critical here. The withholding is calculated on the entire sale price — not on the gain, not on the equity, not on the net proceeds. If you purchased a property for $800,000, spent $50,000 on improvements, and sell it for $1,000,000, the buyer withholds $150,000 (15% of $1,000,000) — even though your actual gain is only $150,000 ($1,000,000 - $800,000 - $50,000). Your actual capital gains tax on a $150,000 gain at the 15% long-term capital gains rate would be $22,500. The difference between the $150,000 withheld and the $22,500 owed — a total of $127,500 — is refunded to you when you file Form 1040-NR. But that refund can take 6 to 12 months to process, during which time the IRS holds your money interest-free.
This is why the withholding certificate process exists. By filing Form 8288-B with the IRS before or at the time of closing, you can request that the IRS authorize reduced withholding based on your actual expected tax liability. If your actual tax will be $22,500, the IRS may authorize withholding of only $22,500 instead of $150,000. The application should be filed as early as possible — ideally 90 days before the expected closing date — because IRS processing times can be lengthy. If the certificate is not issued by closing, the full 15% must be withheld, and you claim the refund on your tax return.
FIRPTA Withholding Rates: The Three Tiers
Not all transactions are subject to the full 15% withholding. Congress created a tiered system that reduces the burden for lower-value transactions, particularly those involving personal residences:
Zero percent withholding applies when the buyer intends to use the property as a personal residence and the sale price is $300,000 or less. Both conditions must be met — the buyer must sign an affidavit confirming their intent to reside in the property for at least 50% of the days it is in use during each of the first two 12-month periods after closing. This exception is designed for modest residential transactions and does not apply to investment properties.
Ten percent withholding applies when the buyer will use the property as a residence and the sale price is between $300,001 and $1,000,000. Again, the buyer must sign the residency affidavit. This reduced rate acknowledges that on properties in this price range, the full 15% withholding often exceeds the seller's actual tax liability.
Fifteen percent withholding applies to all other transactions — investment properties at any price, personal residences sold for more than $1,000,000, and any transaction where the buyer does not intend to use the property as a residence. This is the rate that applies to the vast majority of non-resident investor transactions.
Case Study: Yuki from Japan Sells Her Personally-Owned New York Apartment
FIRPTA withholding on personal ownership, the refund process, and why structure matters
Yuki, a Japanese national living in Tokyo, purchased a one-bedroom apartment in Manhattan in 2019 for $650,000. She used it as a pied-à-terre during business trips to New York, renting it out through a property manager when she was not using it. In 2025, she decides to sell. The apartment has appreciated to $820,000. Over the years, she spent $30,000 on renovations (new kitchen, bathroom updates) and $45,000 in selling costs (broker commission, transfer taxes, legal fees).
At closing, the buyer's attorney withholds $123,000 (15% of $820,000) and remits it to the IRS via Form 8288. Yuki's actual gain calculation looks like this: $820,000 (sale price) minus $650,000 (purchase price) minus $30,000 (improvements) minus $45,000 (selling costs) equals a taxable gain of $95,000. At the 15% long-term capital gains rate, her actual federal tax is $14,250. She also owes New York State tax of approximately $6,300 and New York City tax of approximately $3,600.
Yuki's total tax liability is approximately $24,150 — but the IRS is holding $123,000. She files Form 1040-NR for 2025, reports the sale, calculates her actual tax, and claims a refund of $98,850. The refund arrives eight months later. Had Yuki filed Form 8288-B before closing and obtained a withholding certificate, the buyer would have withheld only approximately $24,150, and Yuki would have received the remaining $98,850 at closing rather than waiting eight months for a refund. The lesson: always file Form 8288-B well in advance of your closing date.
There is an additional wrinkle. Japan has a tax treaty with the United States, but the treaty preserves the US right to tax real property gains under Article 13. However, Japan will grant Yuki a foreign tax credit for the US taxes paid, avoiding double taxation. Her Japanese CPA coordinates with her US CPA to ensure the credits are properly claimed.
The structural lesson: Yuki owned this apartment personally, which is why FIRPTA applied. Had she held the property through a US C-Corporation, the corporation (a domestic entity) would have sold the apartment — and FIRPTA withholding would not have applied at all. The corporation would have paid the 21% corporate tax on the gain, and Yuki would have retained full control of her capital at closing. For her next US property investment, Yuki's CPA recommended a corporate structure to avoid this exact scenario.
James Baker CPA walks through real estate ownership structures and tax planning strategies for non-resident investors
The $60,000 Estate Tax Trap: The Rule That Catches Every Foreign Investor Off Guard
If there is one area of US tax law that non-resident real estate investors consistently underestimate, it is the estate tax. Most foreign investors are aware of income tax on rental income and capital gains tax on sales. Very few understand that the United States imposes a tax on the mere ownership of US property at the time of death — and that the rules for non-residents are dramatically harsher than for US citizens.
Here is the core disparity: A US citizen or permanent resident who dies in 2024 can pass up to $13.61 million in assets to their heirs completely free of estate tax. This exemption is indexed for inflation and has been rising steadily. A non-resident alien who dies owning US-situated property receives an exemption of just $60,000. This amount has not changed since 1988. It is not indexed for inflation. It has not been adjusted in over 35 years. In real terms, the $60,000 exemption has lost more than half its value since it was enacted.
The estate tax rates for non-residents are the same as for US citizens — a graduated scale that reaches 40% on amounts over $1 million. But because the exemption is so small, non-residents hit the highest brackets almost immediately. Consider a non-resident alien who owns a single US property worth $1,000,000 at the time of death. After the $60,000 exemption, the taxable estate is $940,000. The estate tax on $940,000 is approximately $345,800. That is more than a third of the property's value — payable by the heirs within nine months of death, regardless of whether the property is sold.
The tax applies to the fair market value of the property, not the equity. If the property is worth $1,000,000 but has a $700,000 mortgage, the full $1,000,000 is included in the gross estate. The mortgage is deductible only to the extent it is proportional to the US estate versus the worldwide estate — a complex calculation that rarely provides full relief. In practice, a heavily mortgaged property can generate an estate tax bill that exceeds the owner's actual equity.
Estate Tax Comparison: US Citizen vs. Non-Resident Alien
| Property Value | US Citizen Tax | NRA Tax | NRA Effective Rate |
|---|---|---|---|
| $250,000 | $0 | $70,800 | 28.3% |
| $500,000 | $0 | $155,800 | 31.2% |
| $1,000,000 | $0 | $345,800 | 34.6% |
| $2,000,000 | $0 | $745,800 | 37.3% |
| $5,000,000 | $0 | $1,945,800 | 38.9% |
* US citizen tax is $0 because all values are below the $13.61M exemption. NRA tax calculated using 2024 estate tax rates with $60,000 exemption. Figures are approximate.
Case Study: Ahmed from UAE — The Estate Tax Surprise on a $3M Portfolio
Multi-property portfolio, estate tax exposure, and the restructuring that saved his family $1.1 million
Ahmed is a UAE national who built a US real estate portfolio over a decade: a $1.2 million condominium in Manhattan, an $800,000 townhouse in Miami, and a $1,000,000 commercial property in Houston. Total portfolio value: $3,000,000. Ahmed's UAE-based attorney assured him that since the UAE has no income tax, his US investments were "tax-efficient." What the attorney did not mention was the estate tax.
At age 58, Ahmed's US CPA ran an estate tax projection. The results were alarming. If Ahmed died while owning these properties directly, his estate would face a US estate tax of approximately $1,145,800 — more than a third of his portfolio's value. The UAE does not have an estate tax treaty with the United States, so there was no treaty relief available. Ahmed's heirs would need to pay this amount within nine months of his death, potentially forcing a fire sale of properties in unfavorable market conditions.
Ahmed's CPA recommended restructuring the ownership. Each property was transferred to a separate US LLC, and each LLC was owned by a US C-Corporation. The US C-Corporation, in turn, was owned by a newly formed BVI holding company, with Ahmed as the ultimate beneficial owner. This two-layer corporate structure is critical: the US C-Corporation sits between the BVI parent and the US LLCs holding the properties.
This structure achieves three things simultaneously. First, because Ahmed owns shares of a foreign corporation (the BVI company), and foreign corporate stock is generally not US-situated property, the properties are removed from Ahmed's US taxable estate. Second, the US C-Corporation — not the BVI company — is the entity that directly owns the LLCs and earns the rental income. Because the income is earned by a domestic corporation, there is no branch profits tax. The branch profits tax (30%) only applies when a foreign corporation has effectively connected income in the US. By inserting the US C-Corporation below the BVI parent, the income never flows through a foreign corporation's US branch. Third, when Ahmed decides to exit, the US C-Corporation sells the properties and pays the standard 21% corporate tax on the gains. Because the seller is a US corporation, FIRPTA does not apply. After paying corporate taxes, Ahmed can then liquidate the US C-Corporation, distributing the remaining proceeds to the BVI parent. The liquidation of a US corporation to a foreign parent is generally free from withholding tax when structured properly — making the exit clean and tax-efficient.
Ahmed's CPA modeled both scenarios over a 20-year horizon. The estate tax savings of approximately $1.1 million, combined with the elimination of FIRPTA withholding and branch profits tax, far outweighed the 21% corporate tax rate on rental income. The restructuring was clearly beneficial — but only because Ahmed's portfolio was large enough to justify the complexity. For a single property worth $500,000 or less, the math often favors direct ownership with a life insurance policy to cover the potential estate tax liability.
Ownership Structures: Direct vs. LLC vs. Corporation vs. Foreign Blocker
The choice of ownership structure is the single most consequential decision a non-resident real estate investor makes — and it must be made before the purchase, not after. Restructuring after acquisition triggers transfer taxes, potential FIRPTA withholding, and reassessment of property taxes in many jurisdictions. Each structure carries distinct implications for income tax, estate tax, liability protection, and administrative complexity.
Structure 1: Direct Ownership (Individual Name)
Direct ownership is the simplest structure and the one most commonly used by first-time non-resident investors. The NRA holds title to the property in their individual name. For income tax purposes, this is straightforward: rental income is reported on Form 1040-NR, the §871(d) election is available, and all standard deductions apply. FIRPTA withholding at sale is 15% of the gross price. The property receives a step-up in basis at the owner's death, meaning heirs inherit the property at its fair market value rather than the original purchase price — potentially eliminating years of accumulated capital gains.
The fatal flaw of direct ownership is estate tax exposure. The property's full fair market value is included in the NRA's US taxable estate, subject to the $60,000 exemption and rates up to 40%. For properties worth more than a few hundred thousand dollars, the estate tax can be devastating. Direct ownership also provides no liability protection — if someone is injured on the property, the owner's personal assets worldwide are potentially at risk.
Structure 2: US Single-Member LLC
The primary purpose of using a US single-member LLC (SMLLC) is legal liability protection. If someone is injured on the property, or if there is a lawsuit related to the property, the LLC creates a legal barrier between the property and the owner's personal assets worldwide. Without an LLC, a judgment creditor could pursue the owner's bank accounts, other properties, and personal assets in any jurisdiction. With an LLC, liability is generally limited to the assets held within the LLC itself.
For federal income tax purposes, the SMLLC is disregarded — the IRS treats it as if it does not exist. All income, deductions, and gains flow through to the individual owner. The §871(d) election is still available. FIRPTA still applies at sale. However, the LLC does not provide estate tax protection. The IRS looks through the disregarded entity to the underlying asset, and the property is still included in the NRA's US taxable estate at the $60,000 exemption level.
However, the SMLLC does trigger an additional filing requirement: Form 5472, the annual information return for 25% foreign-owned US corporations and disregarded entities. The penalty for failing to file Form 5472 is $25,000 per form per year — one of the harshest penalties in the Internal Revenue Code. Many non-resident investors are unaware of this requirement and accumulate years of unfiled returns before discovering the obligation, often during a sale or refinancing.
Structure 3: Foreign Corporation → US LLC
The most common estate tax planning structure involves interposing a foreign corporation between the NRA and the US property. The NRA owns the foreign corporation (typically formed in a jurisdiction like the British Virgin Islands, Cayman Islands, or the NRA's home country). The foreign corporation owns a US LLC, and the US LLC holds the property. Because the NRA owns stock in a foreign corporation — not a direct interest in US real property — the property is generally excluded from the NRA's US taxable estate.
The trade-offs are significant. The foreign corporation is treated as a US corporation for purposes of the rental income (because it is engaged in a US trade or business through the LLC). It pays corporate income tax at 21% on net rental income. When after-tax profits are deemed repatriated to the foreign parent, a branch profits tax of up to 30% may apply (reduced by treaty in some cases). The property does not receive a step-up in basis at the NRA's death, because the NRA does not directly own the property — the corporation does. And the administrative costs are substantially higher: the corporation must file its own US tax return (Form 1120-F), maintain corporate records, and comply with both US and foreign corporate governance requirements.
This structure makes economic sense primarily for high-value portfolios — generally $1 million or more in US real estate — where the estate tax savings justify the additional income tax burden and administrative costs. For a single property worth $300,000, the estate tax exposure (approximately $90,000) may be more efficiently addressed through a life insurance policy than through a corporate structure that increases annual tax costs by thousands of dollars.
Structure 4: Foreign Entity → US C-Corporation → LLC → Property
This is the most sophisticated structure and the one we most often recommend for serious non-resident real estate investors with portfolios above $1 million. The key innovation is inserting a US C-Corporation between the foreign holding company and the US LLC that holds the property. The chain looks like this: the investor owns a foreign entity (such as a BVI company), the foreign entity owns a US C-Corporation, the US C-Corporation owns a US LLC, and the LLC holds the property.
This four-layer structure achieves three critical objectives simultaneously:
1. Estate tax protection. The investor owns shares of a foreign corporation — not US real property. Foreign corporate stock is generally not US-situated property for estate tax purposes, so the real estate is effectively removed from the investor's US taxable estate. The $60,000 exemption trap is completely avoided.
2. Income tax isolation at the corporate level. The US C-Corporation is the entity that earns the rental income (through the LLC). Because the income is earned by a domestic corporation, there is no branch profits tax. The branch profits tax (up to 30%) only applies when a foreign corporation has effectively connected income in the US. By inserting the US C-Corporation below the foreign parent, the rental income is taxed at the flat 21% corporate rate on net income — a predictable and manageable rate. The corporation can deduct all the same expenses (mortgage interest, property taxes, depreciation, management fees, etc.) that an individual would deduct under the §871(d) election.
3. Clean exit through liquidation. When the investor decides to sell, the US C-Corporation sells the properties and pays the standard 21% corporate tax on the gains. Because the seller is a US corporation, FIRPTA does not apply — there is no 15% withholding at closing. After paying corporate taxes, the investor can then liquidate the US C-Corporation, distributing the remaining proceeds up to the foreign parent entity. The liquidation of a US corporation to a foreign parent is generally free from withholding tax when structured properly, making the exit clean and tax-efficient. This is the primary mechanism by which investors recover their capital without the FIRPTA withholding delays and refund processes that plague individual sellers.
The trade-offs are the additional administrative costs (maintaining the foreign entity, the US corporation, and the LLC), the loss of step-up in basis at death, and the 21% corporate tax rate versus the potentially lower individual rates available under the §871(d) election. However, for portfolios above $1 million — and especially for investors from countries without a US estate tax treaty — the estate tax savings and FIRPTA avoidance typically make this structure the clear winner.
Case Study: Sophie from Germany — How a Treaty Saved Her Family $200,000 in Estate Tax
Inheritance of US property, treaty benefits, and the filing requirements most heirs miss
Sophie's father, Klaus, was a German national who purchased a vacation home in Scottsdale, Arizona in 2015 for $750,000. Klaus used the property for two months each winter and rented it out for the remaining ten months through a local property manager. He properly made the §871(d) election and filed Form 1040-NR each year. When Klaus passed away in 2024, the property had appreciated to $950,000.
Without any treaty protection, the estate tax on a $950,000 property would be approximately $326,000 (after the $60,000 exemption). However, Germany and the United States have an estate tax treaty that provides significant relief. Under the US-Germany Estate Tax Treaty, German residents are entitled to a proportional unified credit — essentially, the same $13.61 million exemption that US citizens receive, but prorated based on the ratio of US-situated assets to worldwide assets.
Klaus's worldwide estate was valued at approximately $4,000,000, of which the $950,000 Arizona property represented 23.75%. The proportional unified credit effectively exempted $3,232,375 of US-situated assets from estate tax (23.75% × $13.61 million). Since the Arizona property ($950,000) was well below this proportional exemption, no US estate tax was due. Without the treaty, Sophie would have owed $326,000. The treaty saved her family the entire amount.
Sophie still had to file Form 706-NA (the estate tax return for non-resident aliens) within nine months of Klaus's death to claim the treaty benefit. She also needed to file Klaus's final Form 1040-NR reporting the rental income earned in the year of death. And because Sophie inherited the property (rather than purchasing it), she received a step-up in basis to the $950,000 fair market value at the date of death — meaning that if she sells the property immediately, she owes zero capital gains tax on the $200,000 of appreciation that occurred during Klaus's lifetime.
Key takeaway: Not all countries have estate tax treaties with the United States. Countries with favorable treaties include the United Kingdom, Germany, France, Japan, Australia, Canada, and several others. If your country does not have an estate tax treaty with the US, the $60,000 exemption applies in full, and alternative structures (like the foreign corporation approach) become much more important.
Essential IRS Forms for Non-Resident Real Estate Investors
Every form you will encounter during the purchase, ownership, and sale of US real property — and the consequences of missing each one.
Non-resident real estate investors interact with more IRS forms than almost any other category of foreign taxpayer. Each form serves a specific purpose in the tax compliance chain, and missing any one of them can trigger penalties ranging from $25,000 to the full amount of tax owed. Understanding when each form is due, who is responsible for filing it, and what information it requires is essential for staying compliant.
Form 1040-NR (US Nonresident Alien Income Tax Return) is your annual income tax return. You file this to report rental income (with the §871(d) election and all deductions), capital gains from property sales, and any other US-source income. The due date is June 15 for non-residents (not April 15), with extensions available to October 15. This is the form where you claim your deductions, calculate your actual tax, and request refunds of excess FIRPTA withholding.
Form 5472 (Information Return of a 25% Foreign-Owned US Corporation) must be filed if you own US real property through a single-member LLC. Even though the LLC is disregarded for income tax purposes, the IRS requires this information return to track transactions between the LLC and its foreign owner. The penalty for failure to file is $25,000 per form per year — one of the harshest in the entire tax code. Form 5472 is attached to a pro forma Form 1120 (corporate tax return) filed by the LLC.
Form 8288 and Form 8288-A are the FIRPTA withholding forms. The buyer files Form 8288 to report and remit the withholding to the IRS within 20 days of closing. Form 8288-A is the statement of withholding provided to the seller, which the seller uses to claim credit for the withholding on their Form 1040-NR. As the seller, you do not file these forms — but you need to ensure the buyer files them correctly, because errors can delay your refund by months.
Form 8288-B (Application for Withholding Certificate) is filed by the seller before closing to request reduced FIRPTA withholding. This is the form that can save you from having 15% of the gross sale price tied up with the IRS for 6-12 months. File it at least 90 days before your expected closing date.
Form W-8 ECI is provided to your property manager or tenant when you make the §871(d) election. It certifies that your rental income is effectively connected with a US trade or business, preventing the 30% FDAP withholding. The form must be renewed every three years.
Form 1120-F (US Income Tax Return of a Foreign Corporation) must be filed by any foreign corporation that owns US real estate directly or through a disregarded LLC. This applies to Structure 3 (Foreign Corporation → US LLC) where the foreign entity itself is the direct owner of the US trade or business. The foreign corporation reports its effectively connected income on Form 1120-F and pays the 21% corporate tax rate on net income. Additionally, the foreign corporation may be subject to the branch profits tax, which is reported on the same return.
Form 1120 (US Corporation Income Tax Return) is filed by US C-Corporations that own real estate (either directly or through LLCs). This applies to Structure 4 (Foreign Entity → US C-Corp → LLC → Property) where the US corporation is the entity earning the rental income and capital gains. The corporation reports all income, deductions, and credits on Form 1120 and pays the flat 21% corporate tax rate. Because the filer is a domestic corporation, there is no branch profits tax and no FIRPTA withholding when the corporation sells property.
Form 1065 (US Return of Partnership Income) must be filed when US real estate is held through a multi-member LLC taxed as a partnership. The partnership itself does not pay tax — instead, it passes income and deductions through to the individual partners via Schedule K-1. However, when any partner is a foreign person, the partnership has critical withholding obligations. Form 8804 (Annual Return for Partnership Withholding Tax) must be filed along with Form 8805 for each foreign partner. The partnership is required to withhold tax on the foreign partner's share of effectively connected income — generally at the highest applicable rate (37% for individuals, 21% for corporations). This withholding is reported on Form 8804 and remitted to the IRS. The foreign partner then claims credit for the withholding on their individual Form 1040-NR. Failure to withhold and file Forms 8804/8805 exposes the partnership to significant penalties and interest.
Form 706-NA (US Estate Tax Return for Nonresident Aliens) must be filed within nine months of death if the decedent's US-situated assets exceed $60,000. This is filed by the estate's executor or administrator, not by the decedent. Extensions are available by filing Form 4768.
Seven Costly Mistakes Non-Resident Real Estate Investors Make
Each of these mistakes costs foreign investors thousands — sometimes hundreds of thousands — of dollars every year. All are preventable with proper planning.
1Failing to Make the §871(d) Election
This is the most expensive mistake by far. Without the election, rental income is taxed at 30% on the gross amount with no deductions. On a property generating $60,000 in annual rent with $55,000 in expenses, the difference between FDAP treatment ($18,000 tax) and ECI treatment ($500 tax) is $17,500 per year. Over a 10-year holding period, this single oversight costs $175,000. Many investors do not discover this election exists until they have been paying the 30% rate for years.
2Ignoring Estate Tax Until It Is Too Late
Estate tax planning must happen before or at the time of purchase — not after. Transferring property from individual ownership to a corporate structure after acquisition triggers FIRPTA withholding (because the transfer is a disposition of US real property), transfer taxes, and potential reassessment of property taxes. Many investors learn about the $60,000 exemption only when their estate planning attorney raises it years after the purchase, by which time restructuring is prohibitively expensive.
3Not Filing Form 8288-B Before Closing
The FIRPTA withholding of 15% on the gross sale price almost always exceeds the seller's actual tax liability. On a $1 million sale with a $100,000 gain, the withholding is $150,000 but the actual tax might be $15,000. Without a withholding certificate, the seller waits 6-12 months for a $135,000 refund. Filing Form 8288-B 90 days before closing can reduce the withholding to the actual tax amount, keeping that $135,000 in the seller's pocket at closing.
4Missing the 16-Month Filing Deadline
If you make the §871(d) election but fail to file your Form 1040-NR within 16 months of the original due date, the IRS can deny all your deductions and credits. You revert to the 30% gross taxation — retroactively. This deadline is absolute and rarely waived. Many non-resident investors who are accustomed to their home country's more lenient filing deadlines discover this rule only when the IRS rejects their return.
5Forgetting Form 5472 for LLC-Owned Properties
Every single-member LLC owned by a non-resident must file Form 5472 annually, reporting transactions between the LLC and its foreign owner. The penalty for non-filing is $25,000 per form per year. An investor who has owned a property through an LLC for five years without filing Form 5472 faces potential penalties of $125,000. The IRS has been aggressively enforcing this requirement since 2017, when the regulations were expanded to cover disregarded entities.
6Overlooking State and Local Taxes
Federal taxes are only part of the picture. States like California (up to 13.3%), New York (up to 10.9%), and Hawaii (up to 11%) impose their own income taxes on rental income and capital gains from property within their borders. Some states also have their own FIRPTA-like withholding requirements. California, for example, requires 3.33% withholding on real estate sales over $100,000 by non-residents. Investors who budget only for federal taxes are consistently surprised by state tax bills that add 5-13% to their total burden.
7Using the Wrong Depreciation Method or Forgetting Depreciation Entirely
Depreciation is one of the most powerful deductions available to real estate investors, but many non-residents either forget to claim it or use the wrong method. Residential rental property must be depreciated over 27.5 years using the straight-line method. Commercial property uses 39 years. The land value must be separated from the building value (only the building is depreciable). On a $500,000 property with $400,000 in building value, annual depreciation is $14,545 — a significant deduction that reduces taxable income without any cash outlay. Failing to claim depreciation does not prevent depreciation recapture tax when you sell — the IRS calculates recapture based on the depreciation you should have claimed, not what you actually claimed.
Recommended Structure by Investment Scenario
The right ownership structure depends on your portfolio size, home country, investment horizon, and risk tolerance. Here are the most common scenarios and our recommendations.
Single property under $500,000: An LLC is the minimum recommended structure — personal ownership is never a good idea. Even for a modest investment, the LLC provides essential legal liability protection, separating your personal assets from property-related claims. The LLC is a disregarded entity for tax purposes, so it does not change your tax filing obligations, but it creates a critical legal shield. If you are from a country without a US estate tax treaty, a life insurance policy can protect against the estate tax exposure — this is not always the optimal solution, but it can be a simpler and more cost-effective choice than a full corporate structure. However, there is no one-size-fits-all answer; the right approach depends on your specific circumstances.
Portfolio over $500,000: At this level, you should consider all of the factors in the Expansion Ecosystem Analysis. Generally, the recommended structure is a US holding corporation that owns an LLC for each property. The corporation isolates income taxes at the corporate level (21% flat rate on net income), eliminates FIRPTA withholding on property sales (because the seller is a domestic entity), and when combined with a foreign holding company above it, removes estate tax exposure entirely. Each property should be held in a separate LLC under the corporation for liability isolation between properties.
Important note on foreign corporations: We generally do not recommend having a foreign corporation directly own a US LLC. When a foreign corporation earns effectively connected income in the US (through an LLC), it must file Form 1120-F and pay US income tax on that income. On top of that, the foreign corporation is subject to the branch profits tax — an additional 30% tax on the after-tax earnings that are deemed repatriated to the foreign parent. This double layer of taxation makes the foreign corp → US LLC structure significantly less favorable. Instead, the preferred approach is to insert a US C-Corporation between the foreign entity and the US LLCs, which eliminates the branch profits tax entirely.
Treaty country investors: If your country has an estate tax treaty with the United States, evaluate whether the treaty provides sufficient relief before adding corporate complexity. Some treaties (such as the US-Canada and US-UK treaties) provide a proportional unified credit that can significantly reduce or eliminate estate tax. In those cases, a simpler LLC structure may be preferable, as you retain the step-up in basis benefit at death. But even with a treaty, the LLC remains essential for liability protection.
Commercial property or development: Commercial properties and development projects almost always warrant a more sophisticated structure — typically a US LLC taxed as a partnership (if multiple investors) with a US C-Corporation above it, or a single-investor structure with the foreign holding company → US C-Corporation → US LLC chain. The higher values, longer holding periods, and greater liability exposure justify the additional complexity and cost.
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Frequently Asked Questions
Detailed answers to the most common questions about US real estate investment, FIRPTA, rental income taxation, and estate tax for non-resident aliens.
US Real Estate Investment Is Complex. You Don't Have to Navigate It Alone.
From FIRPTA withholding certificates to the §871(d) election to estate tax planning structures, every decision you make as a non-resident real estate investor has long-term tax consequences. James Baker CPA has helped hundreds of international investors structure their US real estate holdings for maximum tax efficiency and minimum risk.