Cross-Border Real Estate Is Its Own Category
Cross-border real estate is not just domestic real estate with one extra form. Foreign nationals owning U.S. property and U.S. persons owning property abroad face different withholding rules, different depreciation rules, different filing requirements, and different planning issues around ownership structure and exit.
This page covers the situations we most often handle: foreign nationals with U.S. rental property, foreign sellers subject to FIRPTA, U.S. real estate partnerships with nonresident partners, and U.S. persons with foreign rental property.
Foreigners Owning U.S. Real Estate
This is the main cross-border real estate issue we see. A foreign owner of U.S. rental property is generally subject to U.S. tax on that income, but the default regime is often unnecessarily punitive. Without the right election, withholding can apply at 30 percent of gross rental receipts, before deductions for depreciation, mortgage interest, repairs, taxes, or management fees.
The Section 871(d) election changes that result by treating rental income as effectively connected income, which allows the owner to be taxed on net income and file a Form 1040-NR. In most cases, that is the right framework for a rental property with real operating expenses. We handle the annual filing stack around that election, including ITIN support, withholding coordination, state returns where required, and the 1040-NR itself.
FIRPTA on Sale
When a foreign person sells U.S. real estate, FIRPTA generally requires the buyer to withhold 15 percent of the gross sales price at closing. That withholding is not the final tax. It is a deposit against the seller’s actual U.S. tax liability, which is later reported on Form 1040-NR. Because the withholding is based on gross proceeds instead of gain, it can be far higher than the tax ultimately owed.
Timing is critical. If the actual tax is expected to be lower, a withholding certificate application may reduce or eliminate the amount withheld, but the application generally needs to be in motion before or at closing. We handle FIRPTA withholding certificate work, gain and basis analysis, depreciation recapture review, and the sale-year filing.
U.S. Partnerships with Nonresident Partners
A U.S. partnership that owns real estate and allocates effectively connected income to a nonresident partner takes on a different compliance burden. Section 1446 generally requires withholding on the foreign partner’s allocable share of effectively connected taxable income, whether or not cash is actually distributed. The partnership files Form 8804 and issues Form 8805 to each foreign partner.
The foreign partner then files Form 1040-NR to report the income and claim credit for the withholding. This is one of the areas where partnership compliance and individual nonresident compliance have to be handled together. We prepare the partnership filing, the 8804/8805 withholding reporting, and the related 1040-NR when the engagement includes both sides.
U.S. Persons Owning Foreign Real Estate
U.S. persons with foreign rental property still report that income on their U.S. return, but the depreciation rules are different. Foreign residential rental property generally uses a 30-year ADS life. Foreign commercial property generally uses a 40-year ADS life. Those recovery periods are longer than the domestic rules, and bonus depreciation is generally not available in the same way.
The result is usually a smaller annual depreciation deduction than a comparable U.S. property would produce. At the same time, foreign income taxes may generate foreign tax credits, and foreign bank or financial accounts tied to the property may create FBAR or FATCA reporting issues. We coordinate the property-side reporting with the rest of the international filing picture.
Ownership Structure, Estate Tax, and Planning
How the property is held matters. Foreign individuals owning U.S. real estate directly may have U.S. estate tax exposure because U.S. real property is a U.S.-situs asset. Holding through an entity can change the estate tax result, but it can also change the income tax consequences, administrative burden, and FIRPTA analysis. There is rarely a one-size-fits-all answer.
We review ownership structure questions before acquisition when possible and, when the structure already exists, help clients understand the tax cost of keeping it versus changing it.
Who This Is For
This page is for foreign nationals who own or are selling U.S. property, U.S. partnerships with nonresident partners, and U.S. persons with rental property outside the United States. For domestic real estate matters such as REPS, short-term rentals, domestic partnerships, cost segregation, and 1031 exchanges, see the real estate page under Business Tax.