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“Don’t Come Around Here”[i]

There have been some interesting developments of late with respect to the ownership of real property in parts of the English-speaking world. For example, Canada has imposed a temporary ban on the purchase of such property by foreigners. In Australia, a foreigner has to be granted permission by a federal governmental body before they can purchase real estate. Florida is considering a ban on foreign ownership of residential and farm properties.

The principal rationale given by these jurisdictions for limiting foreign ownership of residential property within their boundaries: wealthy foreigners have been parking their cash in such properties and, in the process, have priced too many local residents out of the market.

These governments are also concerned that some foreign buyers are “bad” actors who are investing in high-end local real estate to launder their ill-gotten gains.

You Can’t Hide?

Neither of these justifications is unfounded.

It is no secret that Manhattan real estate, for example, has long been a favored investment for wealthy foreigners from all over the world.[ii] Indeed, there was a time not long ago (or so it seems to me) when newspapers were reporting that much of the New York City market for luxury apartments was in the hands of foreign absentee owners.[iii]

In response to this development, FinCEN has, for several years now, used Geographic Targeting Orders to require U.S. title insurance companies to identify the natural persons behind shell companies used in “non-financed” – i.e., all cash – purchases of residential real estate in a number of major U.S. metropolitan areas, including New York City, Los Angeles, and Miami.[iv]

More recently, the Corporate Transparency Act[v] requires most LLCs and corporations to disclose certain information regarding their beneficial owners, beginning in 2024.

In addition, New York requires disclosure of the beneficial ownership of entities that buy or sell New York real property.[vi]

Slice of the Big Apple

That said, for every bad actor, there are a great many more legitimate foreign investors who believe that owning a piece of New York City real property is a smart move. Some of these folks are parents acquiring an apartment for their children who are attending college in the City;[vii] others are looking for a hotel substitute; several want somewhere to land in the event of trouble in their home countries;[viii] still others are simply diversifying their investment portfolios.[ix]

All too often, many of these foreign buyers give little thought to the income and estate tax consequences of owning U.S. real property.[x] These buyers will typically acquire the property in their own name, or perhaps in that of an LLC that is either disregarded or treated as a partnership for U.S. tax purposes.

The Worm

In fact, it is only when they decide to sell the real property that these uninformed, or ill-advised, foreigners realize the federal income tax consequences arising from the sale, including their obligation to report the sale to the IRS and the buyer’s obligation to withhold and remit to the IRS an amount equal to 15 percent of the gross purchase price for the property, without regard to the amount of gain that the foreign seller actually recognizes on the sale.[xi]

The Rotten Core

Then there are the beneficiaries of a foreign decedent who died while owning U.S. real property. Such property is included in the decedent’s gross estate for purposes of the U.S. federal estate tax. Unfortunately, the foreign estate is entitled to an estate tax exemption amount of only $60,000, as compared to the $12.92 million[xii] that the estate of a U.S. citizen or domiciliary would enjoy.[xiii]

Moreover, the foreign estate does not have the benefit of the unlimited marital deduction[xiv] for property that passes to the decedent’s surviving nonresident alien spouse; that is unless the property is transferred to a qualified domestic trust (or “QDOT”) for the benefit of such spouse.[xv]

The situation would not necessarily have improved if the foreign owner had made a lifetime gift of the property to their spouse or to a family member. The Code fails to provide any exemption at all for purposes of determining the U.S. federal gift tax attributable to a gift of an interest in U.S. real property by a foreigner, nor does it provide for any marital deduction for an interspousal gift between nonresident aliens other than an annual exclusion of $175,000.[xvi] 

Speaking of transfers between foreign spouses, a lifetime sale, or partial sale,[xvii] of U.S. real property between such spouses would be treated as a taxable sale for purposes of the federal income tax; the same transfer between U.S. spouses – sometimes undertaken to facilitate estate planning – would be treated as a nontaxable gift for income tax purposes.[xviii]

Look Before Biting[xix]

As with so many other investment or business decisions, a nonresident alien should discuss their plans to acquire U.S. real property with tax advisers in both the U.S. and in their country of tax residence. Different situations may require different structures for acquiring, then holding, and ultimately disposing of, the real property on a tax-efficient basis.

At the very least, the foreigner should familiarize themselves with the basic elements of the applicable U.S. tax rules – call it “issue spotting” – including FIRPTA.[xx]


The gain realized by a nonresident alien[xxi] from the disposition of a U.S. real property interest is treated as income that is effectively connected with the conduct of a U.S. trade or business; as such, it is taxable to the foreigner in accordance with the rules generally applicable to U.S. citizens and residents.[xxii]

For purposes of this rule, the term “United States real property interest” (“USRPI”) generally means an interest in real property located in the U.S.

This includes shares of stock in any domestic corporation unless the taxpayer establishes that the corporation was at no time a U.S. real property holding corporation during the 5-year period ending on the date of the disposition of such interest.[xxiii]


The term “U.S. real property holding corporation” (“USRPHC”) means any corporation if the fair market value of its USRPIs equals or exceeds 50 percent of the fair market value of (a) its USRPIs, (b) its interests in real property located outside the U.S., plus (c) any other of its assets which are used or held for use in a trade or business.[xxiv]

Thus, a foreigner’s gain from a sale of stock in a USRPHC is subject to U.S. tax as income that is effectively connected with the conduct of a U.S. trade or business.


Not only is the gain from the foreigner’s sale of their USRPI taxable by the U.S. as effectively connected income, but it is also subject to withholding.

In order to ensure payment of the foreigner’s resulting income tax liability, FIRPTA requires the buyer of the foreign-owned U.S. real property to withhold an amount equal to 15 percent of the amount realized by the foreign seller.[xxv] It then requires that the amount withheld be reported and remitted to the IRS by the 20th day after the date of the sale.[xxvi]

The regulations issued under FIRPTA define the “amount realized” by the seller for the transfer of an interest in U.S. real property as the sum of: (i) the cash paid, or to be paid, (ii) the fair market value of other property transferred, or to be transferred, and (iii) the outstanding amount of any liability assumed by the buyer or to which the U.S. real property is subject immediately before and after the sale.[xxvii]

Significantly, neither the buyer’s duty to withhold nor the amount required to be withheld is affected by the amount of cash to be paid by the buyer.[xxviii]

The duty to withhold is subject to modifications; for example, the amount required to be withheld may be modified pursuant to a withholding certificate issued by the IRS.[xxix]

Estate / Gift Tax

As indicated above, if a foreigner dies while owning U.S. real property, such property will be included in their U.S. gross estate for purposes of the federal estate tax. In the absence of treaty relief,[xxx] the foreign estate will be limited to an exemption of only $60,000.

In addition, the lifetime gift transfer of a U.S. real property or of a partial interest in such property (say, as a tenant-in-common) will be subject to the U.S. federal gift tax without the benefit of any exemption.

Incredibly, it is unclear whether the foreigner’s U.S. estate tax or gift tax situation is improved where the U.S. real property is owned through an LLC.

Much has been written about the uncertainty surrounding the IRS’s treatment of the testamentary or gift transfer by a foreigner of a membership interest in an LLC that is treated as a partnership for U.S. tax purposes; specifically, whether such an interest represents an intangible the transfer of which by a noncitizen/nondomiciliary is not treated as a taxable gift by the U.S.,[xxxi] and whether the LLC interest should be treated as situated at the foreign decedent’s domicile and, thus, not part of their U.S. gross estate.

In my opinion, the better position, all things being equal, is that the transfer of an interest in a partnership that owns U.S. real property should be subject to the U.S. gift and estate taxes to the extent that the value of the transferred interest is attributable to such real property.[xxxii]


Where does that leave the foreigner who has already purchased U.S. real property that they now hold directly or through an LLC?[xxxiii] Is it too late for them to implement any tax-saving measures?

Not yet – there is still time to plan.

According to the Code, the gift tax does not apply to the transfer of intangible property by a nonresident alien.[xxxiv] For example, the foreigner’s gift transfer of stock in a U.S. corporation is not subject to the federal gift tax, even where the corporation owns U.S. real property.

So, let’s assume the nonresident alien organizes a U.S. corporation under state law. Next, the foreigner contributes their U.S. real property to the newly formed corporation in exchange for all of its stock. This exchange may be accomplished on a tax-deferred basis, and the stock of the corporation received by the foreigner will be treated as an interest in U.S. real property (stock in a USRPHC), the subsequent sale of which will be subject to tax under FIRPTA.[xxxv]

Of course, it is imperative that the corporation be respected for U.S. tax purposes. In other words, the foreign shareholder cannot treat the corporation as their alter ego – the corporation cannot be a sham the only purpose of which is to avoid taxes.[xxxvi] All corporate formalities have to be followed and the corporation must treat with the shareholder on an arm’s length basis. Failing this, the corporation will be ignored by the IRS.

What about the U.S. estate tax? Unfortunately, the stock of a domestic corporation owned by a nonresident alien at the time of their death will be treated as U.S. property for purposes of the tax and, so, will be included in their U.S. gross estate.[xxxvii]

Can the foreigner address this estate tax problem by contributing the U.S. real property instead to a foreign corporation in exchange for its stock?

Unfortunately, the transfer of U.S. real property by a foreigner to a foreign corporation in exchange for all the stock of such corporation is treated as a taxable transaction because such foreign stock is not a USRPI.[xxxviii]

Section 897(i) Election

Where does that leave the nonresident alien who purchased U.S. real property in their own name or in an LLC?

As it turns out, there is another option to consider if the foreigner resides in a country with which the U.S. has a tax treaty.  

Specifically, if a foreign corporation that holds a USRPI is entitled to nondiscriminatory treatment with respect to that interest under the treaty,[xxxix] then such foreign corporation may elect under Section 897(i) of the Code to be treated as a domestic corporation for purposes of the rules under FIRPTA.[xl]

Thus, a foreign corporation with respect to which such an election is in effect is subject to all the tax and withholding rules under FIRPTA that apply to domestic corporations.[xli]

For example, if the electing foreign corporation is a USRPHC, then the shares of stock of the corporation are USRPIs, the amount realized on the disposition of such stock is subject to withholding under FIRPTA, and any gain from the disposition of such stock by a foreigner will be treated as effectively connected with a U.S. trade or business.[xlii]

However, stock of an electing corporation is not treated as a USRPI if, following the election, the corporation does not hold any USRPIs because the corporation disposed of all such interests in transactions in which the full amount of the gain was recognized.[xliii] Likewise, no withholding would be required with respect to that corporation’s subsequent liquidating distribution to a foreign shareholder.[xliv]  

The Election

This election may be made only if all of the owners of all classes of stock of the foreign corporation at the time of the election consent to the election and agree that gain, if any, from the disposition of such stock will be taxable notwithstanding any provision to the contrary in a treaty to which the U.S. is a party.

A foreign corporation may make an election under Section 897(i) only if it meets all three of the following conditions:

  • The foreign corporation must hold a USRPI at the time of the election.
    • Significantly, this condition is satisfied when a USRPI is acquired simultaneously with the effective date of an election.[xlv]
    • For example, the foreign corporation acquires U.S. real property from a foreign individual in exchange for shares of the corporation’s stock and, immediately following the exchange, the individual owns stock possessing at least 80 percent of the total combined voting power of all classes of stock of the corporation entitled to vote and at least 80 percent of the total number of shares of all other classes of stock of the corporation.[xlvi]
  • The foreign corporation must be entitled to nondiscriminatory treatment with respect to its USRPI under any treaty to which the U.S. is a party.[xlvii]
  • The foreign corporation must comply with the requirements respecting the manner and form in which an election must be submitted. 

The election is made by filing the following materials (which may be incorporated in a single document):[xlviii]

  • The foreign corporation must supply a general statement indicating that an election under Section 897(i) of the Code is being made. Although no particular form is required for the statement, it must contain certain prescribed information including, among other things: the name and identifying number of the foreign corporation, the treaty and article under which the foreign corporation is seeking nondiscriminatory treatment, a description of the USRPI held by the corporation, the corporation’s adjusted bases in such interests, and their fair market values as of the date of the election.
  • The foreign corporation must submit a binding waiver of the benefits of any U.S. treaty with respect to any gain or loss from the disposition of a U.S. real property interest during the period in which the election is in effect.
  • The foreign corporation must submit a binding agreement to treat as though it were a domestic corporation any gain or loss that is recognized upon the disposition of any U.S. real property interest during the period in which the election is in effect, and upon the disposition of any property that it acquired in exchange for a U.S. real property interest in a nonrecognition transaction during the period in which the election is in effect.

A foreign corporation that meets these conditions may make the election at any time before the first disposition of an interest in the corporation which would be subject to FIRPTA if the election had been made before that disposition. The period to which the election applies begins on the date on which the election is made. Unless revoked, an election applies for the duration of the time for which the corporation remains in existence.[xlix]

A foreign corporation that has made such an election shall also be treated as a domestic corporation for purposes of the withholding required under FIRPTA,[l] meaning that it may provide a transferee (for example, a buyer) with a certification of its non-foreign status in connection with the corporation’s disposition of a USRPI and thereby eliminate the withholding requirement.[li]

By the same token, dispositions of shares of stock in an electing foreign corporation are subject to FIRPTA’s withholding requirements.[lii]

Therefore, if a foreign person disposes of stock in such a foreign corporation, and that interest is a USRPI, then the transferee is required to withhold under FIRPTA notwithstanding that the corporation may also own assets other than USRPIs.[liii]

Still A Foreign Corporation

Significantly, a foreign corporation that makes an election under Section 897(i) is not treated as a domestic corporation for purposes of any other provision of the Code, except to the extent that it is required to consent to such treatment as a condition to making the election.[liv]

Thus, it may still behoove the corporation and its shareholders for the corporation to also elect to treat its rental income from U.S. real property as income which is effectively connected with the conduct of a U.S. trade or business.[lv] Of course, in that case, the foreign corporation would be subject to the branch profits tax.[lvi]

Likewise, the gain on the sale of a U.S. real property interest by a foreign corporation that has made an election to be treated as a domestic corporation under section 897(i) will also give rise to “effectively connected earnings and profits” for purposes of the branch profits tax.[lvii]

More importantly for the nonresident alien who owns the stock of the foreign corporation, such stock will not be treated as U.S. situs property for purposes of the U.S. estate tax. Thus, the value of such stock will not be included in the foreigner’s U.S. gross estate.


The foregoing covered a lot of ground.[lviii] In the end, the nonresident alien who acquires U.S. real property in their own name may still be able to mitigate some of the adverse tax consequences that would otherwise await them, but they have to act sooner rather than later – not all taxable events are within their control.

That said, think how much easier it may have been if the foreigner had first consulted with U.S. and foreign tax advisers before acquiring the property.

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The opinions expressed herein are solely those of the author(s) and do not necessarily represent the views of the Firm.

[i] Apologies to the late great Tom Petty.

[ii] Who more often than not acquired such properties through LLCs so as to hide their identities.



In addition, CFIUS reviews proposed acquisitions of U.S. real property that is located near what may be described as “sensitive” government facilities. The agency is authorized to unwind transactions.  

[v] P.L. 116-283. See also the regulations issued under Sec. 6403 of the Act.

[vi] NY Tax Law Sec. 1409.

[vii] I’ve encountered such investors – when they ultimately sell the property, they often recoup much of the tuition expense.

[viii] I hope this never grows old. That said, I’ve been reading about the increasing number of Americans who are shopping for a place overseas for that very same reason. Not a welcome development.

[ix] The property may be held out for rent or simply held for appreciation; regardless, it’s a long-term play.

[x] I’m still encountering U.S. residents – many from N.Y. – who are making the same mistake with respect to NYC property! 

[xi] See last week’s post:

[xii] For 2023.

[xiii] Reg. Sec. 20.01-1(b); IRC Sec. 2010 and Sec. 2102(b). The word “enjoy” may not be appropriate in this context – the decedent’s death is a hefty price to pay for this benefit.

[xiv] IRC Sec. 2056(d).

[xv] IRC Sec. 2056A.

[xvi] For tax year 2023. IRC Sec. 2523(i). There is no QDOT equivalent for a lifetime gift.

[xvii] Including a transfer of real property that is encumbered by indebtedness; for example, a part-sale/part-gift.  

[xviii] IRC Sec. 1041.

[xix] Does it get cornier? Unfortunately, yes. For some reason, tax folks enjoy plays on words, puns, and the like.

[xx] Foreign Investment in Real Property Tax Act of 1980. P.L. 96-499. In general, see IRC Sec. 897 and Sec. 1445.

[xxi] Or a foreign corporation. Our focus here is on individuals.

[xxii] IRC Sec. 897(a), Sec. 871(b).

A nonresident alien’s income that is effectively connected with the conduct of a trade or business in the U.S. is taxed at the graduated rates that apply to U.S. citizens and resident aliens.

For example, the gain recognized by a foreign individual on the sale of U.S. real property will be subject to federal income tax at the rate of 20 percent, assuming the property was a capital asset – such as a personal residence – that the foreigner seller held for more than one year. IRC Sec. 1(h), 1221, 1222 and 1223.

[xxiii] IRC Sec. 897(c)(1)(A)(ii).

[xxiv] IRC Sec. 897(c)(2).

[xxv] IRC Sec. 1445; Reg. Sec. 1.1445-1(b).

[xxvi] IRS Forms 8288 and 8288-A are used for this purpose. Note that the identifying numbers of both the seller and the buyer must be provided. Reg. Sec. 1.1445-1(c) and 1.1445-1(d).

[xxvii] Reg. Sec. 1.1445-1(g).

[xxviii] Reg. Sec. 1.1445-1(b)(1).

[xxix] Reg. Sec. 1.1445-3. For example, the IRS may issue a withholding certificate that excuses withholding or permits the transferee to withhold an adjusted amount (less than 15% of the amount realized) reflecting the transferor’s maximum tax liability.

[xxx] The U.S. has entered into estate and gift tax treaties with only 16 countries.

[xxxi] IRC Sec. 2501(a)(2).

[xxxii] This is the position taken in Article 8 of the United States-Germany Estate and Gift Tax Treaty.

[xxxiii] Many foreigners will choose to establish foreign trusts to which they will transfer money with which such trusts will then purchase U.S. real property. The foreigner’s transfer of cash to the foreign trust is not a taxable gift under the Code; so long as the foreigner does not retain any proscribed interests (IRC Sec. 2035 through 2038) in the trust after it has acquired U.S. real property, the trust property will not be included in their U.S. gross estate.

[xxxiv] IRC Sec. 2501(a)(2).

[xxxv] IRC Sec. 351, Sec. 367(b), Sec. 897(e)(1); Reg. Sec. 1.897-6T(a). 

[xxxvi] See, e.g., Fillman v. United States, 355 F.2d 632 (Ct. Cl. 1966).

[xxxvii] IRC Sec. 2104(a).

[xxxviii] Reg. Sec. 1.897-6T(b)(3); Reg. Sec. 1.897-6T(b)(4), Ex. 1. Neither IRC 367(a) nor Sec. 367(b) apply here; because there are no U.S. transferors, and because the transfer is not specifically addressed in the IRC Sec. 367(b) regulations, the transferee foreign corporation is respected as a corporation for purposes of IRC Sec. 351.

Interestingly, if the foreigner held their U.S. real property in a U.S. corporation, the transfer of the stock in such corporation to a foreign corporation in exchange for stock of the foreign corporation may qualify for nonrecognition treatment if certain conditions are satisfied. Reg. Sec. 1.897-6T(b)(1)(iii) and -6T(b)(2).

[xxxix] Yes, I am assuming that the foreigner resides in the jurisdiction in which the foreign corporation is organized; I am assuming a limitation on benefits clause.

[xl] Once made, the election may only be revoked with the consent of the IRS.

[xli] Reg. Sec. 1.897-3(a). See the rules under IRC Sec. 897 and Sec. 1445.

[xlii]  Under IRC Sec. 897(a). 

[xliii] Reg. Sec. 1.897-3(a); Reg. Sec. 1.897-1(c)(2); IRC Sec. 897(c)(1)(B).

[xliv] Reg. Sec. 1.1445-5(e)(3).

[xlv] Reg. Sec. 1.897-3(b)(1).

[xlvi] An exchange described in IRC Sec. 351.

This condition is also satisfied by a corporation that indirectly holds a U.S. real property interest through a partnership, trust, or estate.

[xlvii] Where the corporation indirectly holds a U.S. real property interest through a partnership, trust, or estate, the corporation itself must be entitled to nondiscriminatory treatment with respect to such property interest.

[xlviii] The filing is made at the address specified in the Instructions for Form 8288.

[xlix] Reg. Sec. 1.897-3(d). The IRS is required to acknowledge receipt of the election within 60 days after its receipt.

[l] Reg. Sec. 1.1445-7(a).

[li] Reg. Sec. 1.1445-7(b). 

[lii]  IRC Sec. 1445(a) and Reg. Sec. 1.1445-1 through 1.1445-4.

[liii] IRC Sec. 1445; Reg. Sec. 1.1445-7(b)(2).

[liv] An election under section 897(i) is the exclusive remedy of any foreign person claiming discriminatory treatment under any treaty with respect to the application of sections 897, 1445, and 6039C to a foreign corporation. Therefore, if a corporation does not make an effective election, relief under a nondiscrimination article of any treaty shall not be otherwise available with respect to the application of sections 897, 1445, and 6039C to such corporation.

[lv] IRC Sec. 882(d). This election will allow the foreign corporation to claim deductions for expenses incurred in connection with the rental real property or attributable thereto, including depreciation. The net income would then be taxable at the corporate tax rate.

[lvi] IRC Sec. 884.

[lvii] Reg. Sec. 1.884-1(f)(1).

[lviii] But we are talking about real property, aren’t we? Apologies.