Foreign Investments in RE

1. Tax Considerations Beyond Income Tax

• Estate and Gift Tax Exposure: Foreign individuals directly owning U.S. real estate face significant U.S. estate tax exposure, with only a $60,000 exemption (2024/25)—amounts above this are taxed at rates up to 40%. Using a U.S. corporation or certain trust structures can help mitigate this risk, although each structure has trade-offs.

• FIRPTA Withholding: When a foreign entity or individual sells U.S. real property, the Foreign Investment in Real Property Tax Act (FIRPTA) generally requires the buyer to withhold % of the sale price and remit it to the IRS. This is basically holding towards your capital gains profit that you need to pay a tax towards. Read more about FIRPTA

2. Legal Structures: Options and Implications

• LLC, Corporation, Partnership, Trust: In addition to LLCs and corporations, partnerships and trusts are also commonly used by foreign investors. Each structure has unique implications for liability, taxation, privacy, and estate planning

• Multi-Member LLCs: For group investments, a multi-member LLC is often preferable, as it allows for flexible ownership percentages and clear delineation of roles via the operating agreement

3. Regulatory and Compliance Issues

• Syndication and SEC Rules: If you plan to pool capital from multiple investors, be aware of U.S. securities regulations. Most group investments fall under Regulation D, which allows certain offerings to accredited investors without full SEC registration. Foreign investors must meet the same accreditation standards as U.S. investors

• Tax Identification Numbers: Each entity will need an Employer Identification Number (EIN) and, for individuals, an Individual Taxpayer Identification Number (ITIN) for tax filings. Having an LLC is better than multiple investors repeat same process individually

4. Financing Challenges

• Loan Availability:  For passive investors residing abroad, options are limited, and loan-to-value ratios are lower (often 50–65%). Read more here on Investor Loans

• Lender Types: Consider conduit lenders (CMBS, agency loans) or life insurance companies for stabilized assets, but expect stringent requirements and lower leverages.

5. Operational and Practical Considerations

• Bank Account Setup: Opening a U.S. bank account for your entity is essential but can be slow for foreigners with multiple barriers depending on the Conservativeness of the banks. Start early, and maintain transaction history to avoid delays in transactions. 

• Proof of Funds: U.S. sellers and brokers expect immediate proof of funds, especially for cash offers. For financed deals, keep 10–20% of the purchase price liquid and accessible5. Say at least last three months of average balance maintained in the bank

• Visa Status: Passive investment is generally permitted on visitor visas, but active management may require a different visa type (e.g., E-2 Treaty Investor Visa). Immigration status can affect your investment options and roles4.

6. Privacy and Confidentiality

• Anonymity: Using a U.S. corporation can provide greater confidentiality for beneficial owners, as passthrough structures often require disclosure of ultimate ownership to the IRS7.

• Reporting Requirements: Be prepared for annual federal, state, and local tax filings, as well as compliance with anti-money laundering (AML) regulations.

7. Repatriation of Funds

• Withholding on Distributions: Distributions from U.S. corporations to foreign shareholders may be subject to a 30% withholding tax, though tax treaties can reduce this rate8.

• Ease of Fund Transfers: Direct ownership allows for simpler repatriation of income and sales proceeds, but increases estate tax risk8.

8. Estate and Succession Planning

• Gifting and Inheritance: U.S. gift and estate tax rules are stringent for foreign owners. Consider structuring ownership to facilitate future transfers or inheritance, possibly through corporate shares or trusts78.