Tax Aspects of Foreign Investment in U.S. Real Estate

Foreign investment in U.S. real property has increased in recent years, driven, in part, by the weakness of the U.S. dollar, low interest rates and the deflation of previously high property valuations. Before making a substantial investment in U.S. real property, however, foreign persons should fully consider the U.S. tax consequences of their investment, including those that arise when property is sold and the proceeds are repatriated overseas.

For many individual foreign investors, the desired ownership structure is to employ the use of a foreign corporation, generally one that is organized in a low-tax or tax-haven jurisdiction, to hold title to the U.S. real property. While this strategy may provide estate tax benefits for nondomiciliary individuals who would otherwise be subject to U.S. estate tax if they directly owned U.S. real property at death, a closer evaluation should be made weighing the income tax benefits of various ownership structures versus potential adverse estate tax consequences. Of course, an applicable income or estate tax treaty may have substantial influence on the ultimate form of ownership selected.