Foreign Investors Buying U.S. Real Estate: U.S. Taxes, FIRPTA & LLC Structuring

How rental income is taxed by default

Absent an election, U.S.-source rental income paid to a nonresident is generally subject to a flat 30% withholding tax on the gross rent, with no deduction for mortgage interest, property tax, insurance, management fees, repairs, or depreciation. For a typical leveraged rental, gross-basis taxation can exceed the property's actual economic return.

The Section 871(d) election

A nonresident who owns U.S. real property can generally elect to treat the rental income as effectively connected with a U.S. trade or business. The income is then taxed on a net basis at graduated rates, and ordinary rental expenses and depreciation become deductible. The election is made with a U.S. return and, once in effect, generally continues until revoked with consent. It usually produces a materially better result for a rental property carrying real expenses — but it requires filing.

Yes, there is a U.S. return

A nonresident with effectively connected rental income files Form 1040-NR. A foreign corporation owning U.S. real estate files Form 1120-F. Filing is what preserves the ability to claim deductions; a nonresident who never files can be assessed on gross income with the deductions disallowed. Withholding agents and property managers have their own obligations, and a Form W-8 provided at the start of the relationship determines how the manager withholds.

FIRPTA: the sale is where the cash gets held back

Under FIRPTA, the buyer of a U.S. real property interest from a foreign person generally must withhold a percentage of the gross sales price — commonly 15%, with reduced rates in some residence-and-price situations — and remit it to the IRS. Withholding is on the sales price, not the gain, so a property sold at a loss or a property with a large mortgage payoff can still see significant cash withheld at closing.

The actual tax is computed on the gain when the return is filed, with any excess withholding refunded. A withholding certificate application can reduce the amount held at closing when the expected tax is lower, but it has to be submitted on time relative to the closing date. Depreciation claimed during the rental years generally reduces basis and increases the gain, including depreciation that was allowable but never claimed.

Individual, LLC, or corporation

There is no structure that is right for every foreign buyer. The trade-offs run across income tax rates, filing complexity, liability, privacy, home-country treatment, and — most consequentially — U.S. estate tax.

• Direct individual ownership: simplest and often the lowest income tax rate on gain, but the property is a U.S.-situs asset for estate tax and offers no liability shield.
• Single-member U.S. LLC owned by the individual: generally disregarded for income tax, so the income tax result is similar to direct ownership, with Form 5472 and pro forma 1120 reporting obligations added. A disregarded LLC generally does not solve the estate tax question.
• U.S. corporation: corporate-level tax on income and gain, with distributions to the foreign shareholder potentially subject to withholding; shares are U.S.-situs property for estate tax.
• Foreign corporation, sometimes over a U.S. entity: often used specifically to address estate tax exposure, at the cost of higher effective rates on sale, branch profits tax considerations, and more compliance.

Forming an LLC does not by itself eliminate U.S. taxation. It is a liability and administrative choice; the tax result depends on how the entity is classified and who owns it. A foreign-owned single-member LLC in particular carries its own annual information filing, with meaningful penalties for missing it.

Estate and gift tax: the exposure buyers hear about last

A nonresident who is not domiciled in the United States is generally subject to U.S. estate tax on U.S.-situs assets — including U.S. real estate held directly — with a unified credit that shelters only a very small amount, far below the exemption available to U.S. persons. A treaty may modify this, depending on the investor's country. Gift tax rules also differ: gifts of U.S. real property by a nonresident are generally subject to U.S. gift tax, while gifts of intangible property often are not, which is one reason ownership form matters for succession planning.

Why the structure should be settled before closing

Transferring property into an entity after purchase can trigger transfer taxes, documentary stamp taxes, FIRPTA considerations, lender consent issues, title costs, and in some cases a taxable event. Deciding the ownership form while the purchase is still being negotiated costs comparatively little; unwinding it later rarely does.

A practical sequence for a foreign buyer

• Identify the investor's residence, domicile, family situation, and applicable treaty before choosing a structure.
• Decide whether the holding is a long-term rental, a development, or a short-hold resale, since the answer changes the analysis.
• Obtain U.S. taxpayer identification numbers early — they are needed for filings, elections, and withholding certificates.
• Make the Section 871(d) election where it improves the result, and file the annual returns that preserve deductions.
• Plan the exit and the estate consequences at the same time as the purchase.

Sources and official references

• IRS — FIRPTA Withholding
• IRS — Estate Tax for Nonresidents Not Citizens of the United States