From rental withholding rules to FIRPTA regulations and the advantages of structures like LLCs—these are the key tax factors that directly impact the profitability of a property owned by a non-resident.
Buying property in the United States can be an attractive opportunity for foreign investors, but it also requires understanding a complex tax framework with specific rules depending on the type of income, the legal structure used, and the timing of the transaction.
The Internal Revenue Service (IRS) establishes how non-residents must be taxed on income generated in the country, whether from rental activity or the eventual sale of a property. To ensure compliance, the system applies several mandatory withholding obligations and anticipatory payment mechanisms that every investor should understand.
FIRPTA: The Key Regulation Governing Taxation When Selling Property
The Foreign Investment in Real Property Tax Act (FIRPTA), enacted in 1980, authorizes the United States to tax foreign individuals and entities on the sale, exchange, or transfer of real estate located in the country.
When a foreign owner sells a property, the buyer must withhold a percentage of the total sale price and remit it to the IRS as an advance tax payment.
- The standard withholding rate is 15% of the total transaction amount.
- For transactions before February 17, 2016, the rate was 10%.
- If the buyer fails to withhold and the seller is foreign, the buyer may be held liable by the IRS.
The definition of “U.S. real property interest” includes land, buildings, natural resource rights, and even ownership in entities whose value derives primarily from real estate. In the case of foreign corporations distributing a U.S. real property interest, a 21% withholding applies to the recognized gain.
All FIRPTA-related filings are processed through the IRS Service Center in Ogden, Utah.
Rental Withholding: How Recurring Income Is Taxed
Foreigners earning rental income from U.S. property are subject to a 30% withholding on gross income.
The tenant or property manager typically handles this withholding.
However, many investors choose a more favorable alternative: treating rental income as “effectively connected” to a U.S. trade or business.
To do this, the owner must file Form W-8ECI, which allows them to:
- be taxed on net income,
- deduct maintenance expenses, repairs, property tax, insurance, and commissions,
- apply progressive tax rates instead of the flat 30% withholding.
This strategy is often more efficient for medium- and long-term investors.
LLCs: A Flexible Structure for Asset Protection and Tax Optimization
A Limited Liability Company (LLC) is one of the most commonly used legal structures among foreign investors, offering a combination of liability protection and tax benefits.
The IRS does not treat a single-member LLC as a separate entity unless elected otherwise, meaning:
- Income and expenses pass directly through to the owner
- Double taxation (typical of corporations) is avoided
- And an additional layer of protection is provided in case of litigation or claims
LLCs can be formed in nearly any state, though Delaware, Florida, and Texas are the most popular due to administrative simplicity and lower costs.
Key considerations:
- LLCs with more than one member must file an annual informational return.
- Property sales within an LLC remain subject to FIRPTA.
- Some states apply additional taxes or fees that may affect the structure.
Because of these variables, it’s essential to evaluate the structure with both a U.S. accountant and a tax advisor in the investor’s home country.
Other Taxes to Keep in Mind
Beyond FIRPTA and rental withholding, foreign investors must also consider:
- Property Tax: an annual tax based on the assessed value of the property.
- Capital Gains Tax: applied to profits on the sale, though losses may offset gains.
- State and local taxes: which vary by county and city.
It’s also crucial to determine whether a tax treaty exists between the U.S. and the investor’s country of residence, as treaties may reduce withholding rates or allow for foreign tax credits.
Any foreign individual generating U.S. income must obtain an ITIN (Individual Taxpayer Identification Number) to file returns and claim refunds for excess withholdings.
The Importance of Specialized Guidance
The U.S. tax system combines federal, state, and local rules, which can create confusion for new investors. Structuring the investment correctly from the beginning is essential to optimizing profitability and avoiding compliance issues.
Thinking about investing in U.S. real estate? Swann offers comprehensive guidance to help you structure your investment safely and efficiently, in full compliance with current regulations.
Our team supports international clients at every stage—from choosing the most suitable legal structure to navigating tax and accounting requirements. Contact Swann Realty Partners to develop a personalized tax and asset strategy tailored to your investment goals.