Taxation on Real Estate Conference - Virtual-7 - Gallegos - International-Tax-Considerations-in-Real-Estate

7 - Gallegos - International-Tax-Considerations-in-Real-Estate

Pdf Summary

This presentation explains the main U.S. international tax issues that arise in real estate transactions, especially when foreign persons own U.S. property or U.S. investors own property abroad. The core message is that cross-border real estate deals require early identification of residency, ownership structure, tax trigger, and treaty eligibility because the rules are strict and often unforgiving.

Key topics include:
- <strong>Who is a foreign person</strong> for income tax versus estate tax purposes, noting that income tax residency and estate-tax domicile are different tests.
- <strong>Two tax regimes for foreign owners</strong>: FDAP income taxed at a flat 30% on gross income, and ECI taxed on net income at graduated rates.
- <strong>FIRPTA rules</strong> under Sections 897 and 1445, which treat gains from U.S. real property interests as effectively connected income and require withholding at closing.
- <strong>Withholding rates and planning tools</strong>, such as the default 15% withholding, reduced rates for lower-value residential property, non-foreign affidavits, and Form 8288-B withholding certificates.
- <strong>Ownership structures</strong> including direct ownership, U.S. blocker corporations, foreign corporations, partnerships, and REITs, each with different income tax, estate tax, and compliance consequences.
- <strong>Domestically controlled REITs</strong>, which can allow foreign investors to exit without FIRPTA, though the presentation notes recent regulatory changes and pending proposals affecting this strategy.
- <strong>Treaty planning</strong>, which can reduce withholding or branch profits tax in some cases, but generally cannot eliminate U.S. tax on the real estate itself.
- <strong>Estate tax exposure</strong>, highlighting the “60K trap” for nonresident non-domiciliaries who die owning U.S. real estate directly.
- <strong>Outbound planning</strong> for U.S. investors abroad, including worldwide taxation, PFIC/CFC issues, no cross-border 1031 exchanges, and heavy information-return penalties.

Overall, the presentation emphasizes that the best advice comes from spotting cross-border issues early, before closing or death.

Keywords

FIRPTA

U.S. real estate

foreign persons

withholding tax

ECI

FDAP

estate tax

REIT

tax treaty

cross-border transactions