# What must foreign buyers of U.S. real estate consider?

Foreign buyers purchasing U.S. real estate must consider significant tax obligations, including a flat 30% tax on rental income not effectively connected with a U.S. trade or business, withholding taxes upon sale, and potential estate tax liabilities if the property value exceeds $60,000 at death. These rules vary depending on how the property is held and the specific elections the owner makes.

## How is rental income taxed for foreign owners?

According to the Internal Revenue Service, income from U.S. real property owned by a nonresident alien is taxed at a flat 30% rate if it is not effectively connected with a U.S. trade or business. This flat rate applies to the gross rental income without allowing for deductions such as mortgage interest, depreciation, or maintenance expenses.

However, foreign owners have an alternative tax pathway. According to the Internal Revenue Service, a nonresident alien can elect under Internal Revenue Code Section 871(d) to treat U.S. real property income as effectively connected with a U.S. trade or business, allowing them to claim deductions and be taxed at graduated rates. This election can significantly reduce the net tax burden by allowing standard business deductions against the rental income.

## What happens when the property is sold?

Selling U.S. real estate also triggers specific tax withholding requirements designed to ensure compliance by foreign sellers. According to the Internal Revenue Service, the Foreign Investment in Real Property Tax Act of 1980 requires buyers of U.S. real property from foreign persons to withhold 15% of the total amount realized on the disposition.

This current rate is a result of relatively recent legislative changes. According to the Internal Revenue Service, the standard withholding rate under the Foreign Investment in Real Property Tax Act was 10% for property dispositions occurring before February 17, 2016, before increasing to 15%.

Corporate structures face different withholding rules during distributions. According to the Internal Revenue Service, a foreign corporation distributing a U.S. real property interest must withhold a tax equal to 21% of the recognized gain, down from 35% for distributions made before January 1, 2018.

## Are there estate tax implications for foreign owners?

Foreign individual owners must also prepare for potential U.S. estate tax liabilities, which have a much lower threshold than those for U.S. citizens. According to the Internal Revenue Service, the executor of a deceased nonresident who was not a U.S. citizen must file an estate tax return on Form 706-NA if the fair market value of the decedent's U.S.-situated assets exceeds $60,000 at the date of death.

This threshold remains fixed regardless of economic changes. According to the Internal Revenue Service, the $60,000 estate tax filing threshold for nonresident noncitizens is not indexed for inflation. 

Furthermore, executors must adhere to strict filing timelines. According to the Internal Revenue Service, the executor of a nonresident noncitizen's estate must file Form 706-NA within 9 months after the date of death unless a filing extension is granted.

## Sources

* Internal Revenue Service (IRS)

## Disclaimer

This article is for educational purposes only and does not constitute legal, financial, or tax advice. Readers should consult with qualified professional advisors regarding their specific circumstances before making any investment or tax decisions.

Educational content. Not an offer, an investment recommendation, or legal or tax advice.

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