Introduction to Taxation of Foreign Investment in U.S. Real Estate
                     
Webinar Overview:
• Introductions to US Real Estate investment by Foreign Investor
• FDAP income (Not trade or business income)
• Effectively Connected Income (ECI)
• Foreign Investment in Real Property Tax Act of 1980 (FIRPTA)
• Choice of proper investment structure and tax planning
• Tax Implications for
            o Rental income tax
            o Capital Gain tax on eventual disposition of property
            o Estate/Gift tax consequences
   7. Other consideration
            o Anonymity – Non disclosure of identity
            o Assets protection
            o Simplicity of structure to balance against complexity costs.

Who are Foreign Investors?
A Foreign investor is a non-resident alien individual who is
• Not a U.S. Citizen
• Does not have Green Card
• Does not meet the “Substantial Presence Test”: 
To meet this test, a person must be physically present in the United States 
on at least: 
• 31 days during the current year, and 
• 183 days during the 3-year period that includes the current year and the 
2 years immediately before that, considering: 
• All the days a person was present in the current year, and 
• One-Third (1/3) of the days a person was present in the first year before 
the current year, and 
• One-sixth (1/6) of the days a person in the second year before the 
current year.
A Foreign investor is also foreign entity (Corporation, trust, partnership etc
FDAP income and Effectively 
Connected Income
• Fixed or determinable annual or periodic income (FDAP) income also 
subject to tax by the US
• This includes interest, dividends, rent, etc.
• The default classification for rental income is FDAP income.
• FDAP income is generally subject to a flat 30% tax (or lower treaty) 
rate on “Gross income” and deductions are not permitted. 
• Non-Residents are taxed in the US on income effectively connected 
with a US trade or business (ECI) on a NET basis
• Trade or business is not defined in Code/regulations but is any profit 
motive activities carried on in the US on a regular, substantial, and 
continuous basis are classified as trade or business for these 
purposes.
Nonresidents – Election to treat 
real property income as ECI:
Nonresident are permitted to file an election 
under Sec. 871(d) for individual and Sec. 882(d) 
for corporations to treat income generated by 
US real property as ECI
Property must be income producing for 
election to be made
Election cannot made if property producing 
expenses but no income
Election remains in effect all subsequent years 
until revocation
Reg. 1.871-10(d)(1)(ii)- 
ECI election 
• Schedule of all the nonresident’s US real property (and level of 
ownership)
• Location of each real property
• List of improvements, and
• Information on prior net elections
• Real estate held by partnership – election made by partners 
(rather than at the partnership level)
Disposition of US Real Property 
Interest - FIRPTA General Rules
The sale, exchange, or transfer of United States Real Property by foreigners 
may be subject to special withholding. The amount of withholding required is 
typically 15% of the sales price.
IRC 1445 - Buyer is responsible for making sure the IRS receives the withholding 
Tax within the 20 days period.
Payment of withholding tax is sent to IRS with form 8288 and 8288-A
Part I is competed if the buyer is an individual person
Part II is completed if an “Entity” is the buyer


Withholding 
Exemption/Reduction
• Withholding is not the tax itself, and hence less taxable gain or loss on sale 
causes cash flow problem due to withholding. 
• This exemption is exemption/reduction from withholding and not from tax/tax 
filing.
• Under some circumstances, withholding may be reduced or eliminated.
• Buyer intends to use the property as residence at least 50% of time in 2 years 
from closing
• Buyer must be an individual
Sales price $300,000 or less - 0% Withholding Tax
Sales price 300,001 - $1,000,000 - 10% Withholding Tax
Sales price more than $1,000,000 - 15% Withholding Tax
FIRPTA withholding Options:
• Request a Reduction of Withholding Certificate Prior to Closing
• Allow Withholding to Occur and Request a Claim of Refund by filing the Non-Resident Income 
Tax Return
Request a Reduction of Withholding 
Certificate – Form 8288-B
• Treas. Regulation 1.1445-3
• Treas. Regulation 1.1445-6
• Rev. Proc. 2000-35
• IRS Publication 515
• Prepare Form 8288-B
• Prepare Attachment to Form 8288-B 
• Calculation of capital gain tax
• If rental property, calculation of depreciation recapture and suspended passive losses, if 
applicable. 
Allow Withholding to Occur 
and Request a Claim of 
Refund by filing the Non-
Resident Income Tax Return
• File Form 1040NR
• Must have stamped Copy A of Form 8288-A to get refund back from IRS
• If foreign person does not have ITIN they need to obtain one
If a Non resident owns US Real 
Property through 100% owned 
LLC, can they avoid FIRPTA?
• The answer is NO
• Starting in 2017, all foreign-owned Single-Member LLCs that are Disregarded Entities 
are now treated as Corporations for federal reporting requirements (submitting 
information) to the IRS. This doesn’t mean the LLC is paying tax like a Corporation, 
but rather, it’s simply reporting information like a Corporation.
• So, you may have to file Form 1120 page 1 and Form 5472 – Failure to file penalty is 
$25,000
• In addition, there is New FinCen Form for Beneficial Ownership Disclosure starting in 
2022. – Failure to file penalty is $10,000
If I make a 6013(g) election 
will this exempt me from 
FIRPTA?
• When a Nonresident makes a 6013(g) election to file jointly with their US 
spouse, they are agreeing to be taxes as a US tax resident.
• Reg §1.897-9T – Resident alien individuals includes nonresident alien who has 
elected  to be resident under  Code sec 6013(g). 
Does the IRC 121 Exclusion 
apply to Non-Residents?
• IRC 121 allows an individual taxpayer to exclude up to $250,000 (or 
$500,000 if married) of gain if they lived in Primary Residence for two out of 
the last five years. 
Nonresident individual – Transfer 
Taxes
Estate Tax: 
• -Nonresident individuals subject to tax on all property located within the US
• -Shares of a domestic corporation are subject to estate tax but shares of foreign 
corporation are not. 
• Some exceptions: Bank account not used in US trade or business, securities 
generating portfolio interest
• Nonresident individuals receive a $60,000 estate tax exclusion with maximum 40% 
tax rate.
Gift Tax:
• Nonresident normally are subject to gift tax on lifetime gifts of tangible property 
within the US
• No specific gift tax exclusion for nonresident individuals, thought the $16,000 per 
donee annual exclusion is available
Structuring Nonresident US Real Estate 
Investments
• Nonresident who live, work, or own property in the US need to have a clear understanding of the potential 
implications of the US estate and gift tax rules.
• There are multiple types of ownership options available:

OPTION 1 – Individual ownership
Advantage  
•  Graduated individual tax rates for rental income - 10%-37%
•  Long term Capital Gains tax rate 0%-20%
•  No Branch Tax Concern
Disadvantage  
•  Gift / Estate Tax applies
•  Unlimited Personal Liability
•  Disclosure of ownership
OPTION 2 – Limited Liability Company
Advantage
• Graduated individual tax rates for rental income - 10%-37%
• Long term Capital Gains tax rate 0%-20%
• No Branch Tax Concern
• Limited Personal Liability
• Personal Identity Protection
Disadvantage
• Gift / Estate Tax applies
OPTION 3 – U.S. Corporation
Advantage  
•  Flat Corporate tax rate of 21%
• No Branch Tax Concern
• Limited Personal Liability
• Personal Identity Protection
• No gift tax – IRC 2501(a)(2) – US situated intangible 
property including stock of US corp is not subject to gift tax
Disadvantage  
• Estate Tax applies
• Capital Gain taxable as ordinary income
• Double taxation - Dividend taxable 
OPTION 4  - Foreign corporation (Not with 
Inheritance Tax Treaty country)
Advantage
• Flat Corporate tax rate of 21%
• No Gift or Estate Tax
• Limited Personal Liability
• Personal Identity Protection
Disadvantage
• Branch Profit Tax
• Capital Gain taxable as ordinary income
• Double taxation - Dividend taxable 
Why Foreign Corporation works:
• The asset in the decedent’s gross estate is stock/shares in a foreign 
corporation. Foreign corporation stock/ shares are a foreign situated asset 
and are excluded from the gross estate.
• BPT can be avoided with proper tax planning. BPT can be avoided if the 
death tax treaty (inheritance tax treaty) exists. 
• At present Death, tax treaties are in effect with the following countries:
Australia, Greece, Austria, Ireland, Canada, Italy, Denmark, Japan, Finland,  
Netherlands, France, South Africa, Germany, Switzerland, United Kingdom.
• Exist the USA - Form 8848 - BPT does not apply in the year that a foreign 
corporation terminates all US business activities.
OPTION 5 – Tiered Corporate 
Entities
Advantage
• Flat Corporate tax rate of 21%
• No Estate or Gift Tax
• No Branch Profit Tax
• Personal Identity Protection
Disadvantage
• Capital Gain taxable as ordinary income
• Double taxation - Dividend taxable 
OPTION 6 – Non Grantor 
Trust
Advantage  
• No Estate Tax
• No Branch Profit Tax
• Long term Capital Gains tax rate 0%-20%
Disadvantage  
• Give up ownership and control of assets
How irrevocable trust eliminates 
estate tax:
• No assets are includable in the decedent’s gross estate. IRC 2031.
• Settlor: The Settlor is the person who creates the trust by placing a particular 
asset that s/he owns into the trust, which are managed by trustee for the 
benefit of beneficiary
Do You
Have Any
Questions? An Informative Session On:
"U.S. Taxation For Non-Resident 
DO LET US KNOW YOUR Aliens"
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