Foreign investment in US real estate looks simple until the tax bill arrives. A nonresident who buys a US rental property faces three distinct tax regimes, and the default treatment in each one is the expensive one. On rental income, the default is a flat 30% tax on gross rents — no deductions for depreciation, mortgage interest, or property tax. On sale, FIRPTA forces the buyer to withhold 15% of the gross price. And on death, a nonresident, non-citizen owner's estate gets only a $60,000 exemption before US estate tax applies — a fraction of the multimillion-dollar exemption a US person receives.
Each of these defaults has a fix. The 30%-on-gross rental tax is replaced with graduated rates on net income by making a "net election" under IRC Section 871(d). The FIRPTA over-withholding is recoverable through a US return or reduced up front with a withholding certificate. The $60,000 estate exemption can be managed with structuring done before the property is bought. The investors who overpay are the ones who never made the elections; the ones who plan capture US real estate returns without handing an outsized share to the IRS. Florida — no state income tax — is a common landing spot, but the federal regimes still apply in full.
The rental income trap: 30% on gross vs. graduated on net
The starting point for a nonresident's US rental income is harsh. Rent is treated as FDAP — fixed or determinable annual or periodical income — and taxed at a flat 30% on the gross amount. That means no deduction for depreciation, mortgage interest, property taxes, insurance, repairs, or management fees. A property grossing $40,000 in rent owes $12,000 in tax under the default, even if expenses leave little or no economic profit.
The net election under IRC Section 871(d) changes everything. By electing to treat the real property income as effectively connected income (ECI), the investor files a US return (Form 1040-NR for individuals) and pays graduated rates on net income after all ordinary rental deductions. For most leveraged or depreciating properties, net taxable income is a small fraction of gross rent — and the tax follows.
Default: FDAP (no election)
- Flat 30% tax on GROSS rent
- No deductions — depreciation, interest, taxes all ignored
- Tax often collected via withholding on the gross rent
- Simple but almost always overtaxes the investor
Net election: ECI under Section 871(d)
- Graduated rates on NET income after expenses
- Full deductions for depreciation, mortgage interest, property tax, repairs
- Requires filing Form 1040-NR each year
- Usually a dramatically lower tax bill
The Section 871(d) election is made by attaching a statement to a timely filed US return, and it applies to all of the taxpayer's US real property income. Once made, it stays in effect for future years unless revoked with IRS consent. The practical cost is that the investor must file a US return every year — but that filing is exactly what unlocks the deductions that make the numbers work.
Selling the property: gain, ECI, and FIRPTA withholding
When a foreign investor sells US real estate, the gain is taxed as effectively connected income — at capital gains rates for long-term holdings, with depreciation recapture taxed at higher rates. Layered on top is FIRPTA: the buyer must withhold 15% of the gross sales price and remit it to the IRS as a prepayment against that tax.
| Item on sale | Treatment for a foreign investor |
|---|---|
| Gain on the property | Taxed as effectively connected income at capital gains / ordinary rates |
| Depreciation recapture | Taxed at a higher recapture rate — the deductions taken come back on sale |
| FIRPTA withholding | Buyer withholds 15% of gross price at closing as a prepayment |
| Reconciliation | Investor files Form 1040-NR to compute actual tax and claim refund of excess |
| Reducing over-withholding | Apply for a Form 8288-B withholding certificate before closing |
Because FIRPTA is charged on the gross price while the tax is on the gain, the 15% withholding almost always exceeds the actual liability. The investor recovers the difference by filing a US return — or reduces it up front with a withholding certificate (Form 8288-B), covered in a separate MK Tax & Accounting article. Either way, the sale is a filing event, not just a wire transfer.
The estate tax exposure most foreign investors never see coming
US real estate is US-situs property for federal estate tax. When a nonresident, non-citizen owner dies still holding US real property, that property is in their US taxable estate — and here the exemption is brutal. A nonresident non-citizen gets only a $60,000 exemption, compared with the multimillion-dollar exemption a US citizen or resident enjoys. Above $60,000 of US-situs assets, the estate faces US estate tax at rates climbing to 40%.
- US real property is US-situs and included in a nonresident's US taxable estate
- The exemption is only $60,000 — not the large exemption US persons receive
- Estate tax rates rise to 40% on amounts above the exemption
- An estate tax treaty between the US and the owner's country may increase the exemption
- Ownership structure (individual, LLC, foreign corporation, trust) changes the estate exposure — and must be planned before purchase
Estate treaties matter: several countries have treaties with the US that grant a larger effective exemption to their residents. Where no treaty helps, the exposure is managed through the ownership structure — and structure decisions are far cheaper to make before the property is acquired than to unwind afterward.
Structuring the ownership: no single answer
How a foreign investor holds US real estate drives all three regimes — income, sale, and estate — at once. There is no universally right structure; the choice trades off income tax efficiency, FIRPTA mechanics, estate exposure, and administrative cost.
| Structure | Income / sale | Estate tax angle |
|---|---|---|
| Direct individual ownership | Net election gives graduated rates; FIRPTA applies on sale | Fully exposed — $60,000 exemption, property in US estate |
| US LLC (disregarded) | Same as individual for a single foreign owner | Generally does NOT shield from US estate tax |
| Foreign corporation | Corporate-level tax; can block direct US estate inclusion of the real property | Often used to avoid the $60,000 estate trap — but adds corporate tax cost |
| US corporation | Corporate income tax; dividends may face withholding | Shares are US-situs — still exposed unless layered with a foreign entity |
Estate exposure is usually the deciding factor for high-value holdings. A single-member US LLC, popular because it is easy to set up, generally does nothing to shield the property from US estate tax — the IRS looks through it to the individual owner. Investors focused on estate protection often layer a foreign corporation into the structure, accepting higher income tax and compliance cost in exchange for removing the property from direct US estate inclusion. Get this decided before closing; restructuring later can trigger tax.
The compliance calendar that keeps it all working
Each regime carries filing obligations, and the elections that lower the tax only hold if the returns are filed. The discipline is annual, not one-time.
Make the net election early
Attach the Section 871(d) statement to a timely US return so rental income is taxed on net, not 30% of gross.
Secure ITINs
Each foreign owner needs an ITIN (Form W-7) to file US returns, claim FIRPTA credit, and support a withholding certificate.
File Form 1040-NR annually
Report net rental income and pay graduated-rate tax while the net election is in effect.
Plan the sale before listing
Consider a Form 8288-B withholding certificate to reduce FIRPTA over-withholding at closing.
Address estate exposure before purchase
Choose an ownership structure that reflects the $60,000 exemption and any applicable treaty — while it is still cheap to change.
Foreign investment in US real estate is three tax regimes stacked on one asset, and the default in every one overtaxes you. Kill the 30%-on-gross rental tax with the Section 871(d) net election so you deduct depreciation and interest against net income. Treat the sale as a filing event — FIRPTA withholds 15% of gross, and you reconcile or reduce it with a return or a withholding certificate. And handle the $60,000 estate exemption before you buy, through the ownership structure and any treaty, because unwinding it later triggers tax. Florida's lack of state income tax helps, but the federal regimes are where the planning pays. Make the elections, file every year, and structure ahead of purchase.
Investing in US real estate from abroad?
Between the net election, annual 1040-NR filings, and FIRPTA at sale, foreign ownership of US property comes with its own filing checklist. Talk to our team about getting the paperwork right from year one.
Talk to a tax proSources
- IRS — Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities
- IRC Section 871 — Tax on nonresident alien individuals (including 871(d) net election)
- IRS — FIRPTA Withholding (Foreign Investment in Real Property Tax Act), IRC Section 1445
- IRC Section 2102 — Estate tax credits and exemption for nonresident non-citizen estates
- IRS — Some Nonresidents with U.S. Assets Must File Estate Tax Returns (Form 706-NA)
Frequently asked questions
By default, gross rents are treated as fixed or determinable annual or periodical (FDAP) income and taxed at a flat 30% on the gross amount, with no deductions. By making a "net election" under IRC Section 871(d), the investor instead treats the rental as effectively connected income, filing a US return and paying graduated rates on net income after deducting expenses like depreciation, mortgage interest, and property tax — usually a far lower result.
Yes. Gain on the sale of US real estate by a foreign person is taxed as effectively connected income at regular capital gains or ordinary rates, and FIRPTA requires the buyer to withhold 15% of the gross sales price at closing as a prepayment against that tax. The investor files a US return to reconcile the actual tax and claim any refund of over-withholding.
Yes. US real property is US-situs property for estate tax purposes, so a nonresident, non-citizen owner's estate is subject to US estate tax on it. Critically, a nonresident non-citizen gets only a $60,000 estate tax exemption — versus the multimillion-dollar exemption a US citizen or resident receives — so even a modest property can create significant estate tax exposure.
No. Florida has no state personal income tax, so rental income and gains from Florida real estate are not subject to state income tax at the individual level. Federal tax, FIRPTA withholding, and federal estate tax still apply — but the absence of state income tax is one reason Florida is a common entry point for foreign real estate investors.
