It is easy for non-U.S. residents to invest in U.S. real estate. However, you should consider the gift and estate tax implications of such investments and possible tax structuring (entities, trusts, etc.) to minimize exposure.
A non-U.S. resident may purchase U.S. real estate directly and own the property or properties in his or her individual name. However, if the foreign owner then dies, his or her U.S. real estate is subject to US estate tax, often an unpleasant surprise for the surviving family members.
Example: James, a Canadian citizen, buys a Las Vegas rental valued at $300 thousand.. He dies 10 years later when the property is worth $500 thousand. Absent other circumstances, James’ US property is subject to U.S. estate tax on the fair market value of the property at date of death. Assuming a 39% tax rate and no exemption, federal estate tax of $195,000 will be due nine months from James’ date of death
There are a number of steps that non-U.S. residents and their families should consider if faced with the situation of a foreign decedent owning US property, including:
Treaty relief. If the U.S. has an estate tax treaty with the decedent’s home country, the decedent may be entitled to a greater unified credit to apply against the estate tax.
Estate Tax Treaties exist with Australia, Austria, Canada, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, Netherlands, Norway, South Africa, Sweden, Switzerland and the United Kingdom. Terms vary by country.
Pre-death planning. There are any number of steps that could be taken prior to death to avoid U.S. estate tax. Some common considerations include (1) annual exclusion gifts of interests in the property which will qualify for the gift tax annual exclusion, (2) transferring the real estate to a foreign corporation, since the shares of a foreign corporation generally are not subject to U.S. estate tax in a nonresident alien’s estate, or (3) transferring the real estate to another entity, the ownership of which will not be subject to US estate tax. Before taking any of these steps, the property owner should look into the income tax considerations (including FIRPTA), gift tax considerations, and reporting requirements that can be quite onerous. These approaches also should be considered for a surviving spouse’s portion of jointly owned property. (4) The most common approach is for the beneficiary of the property to take out a life insurance policy on the foreign owner in an amount that will cover the U.S. estate tax due. The reason you want the beneficiary to take the policy out and not the owner of the property is because the insurance proceeds will not be included in the owner’s taxable estate.