The More Things Change, the More They Stay the Same? Foreign Investment in U.S. Real Estate after the Tax Cuts and Jobs Act

By Jonathan E. Gopman, Esq. and Paul J. D’Alessandro, Jr., Esq.

On December 22, 2017, President Trump signed into law what is commonly referred to as the Tax Cuts and Jobs Act (the “Act“).The Act represents the most comprehensive reform to U.S. tax law since 1986. In particular, the Act changed many long-standing U.S. international tax rules and principles, affecting a broad array of U.S. taxpayers with cross-border activities. For non-U.S. taxpayers looking to invest in U.S. real estate, however, the Act’s changes may not be as dramatic. This article will provide an overview of the traditional techniques available to foreignerswho desire to invest in U.S. real estate and will then examine those techniques considering the Act’s changes. As will be discussed, the general paradigm may not have changed entirely for foreign taxpayers. Rather, new factors must now be considered when selecting an ideal holding structure for a U.S. real estate investment.


Traditional planning strategies for foreigners who desire to acquire U.S. real estate involve a balancing act between income tax efficiency and estate tax protection. To achieve the desired U.S. tax objectives, foreigners and U.S. tax advisors have implemented corporate, partnership, and trust holding structures. Each structure has its own advantages and disadvantages. To understand the planning strategies behind these structures, a brief overview of the U.S. taxation of foreign-owned U.S. real estate is warranted. For purposes of the following discussion, let us assume that a foreigner owns U.S. real estate directly in his or her own name.

U.S. Taxation of Foreign-Owned Real Estate

From an income tax perspective, the United States taxes the income generated by real estate in the following ways. If the foreigner rents out the property, income tax is imposed on the rental income, although the exact manner of taxation depends on various factors. On the one hand, the United States imposes a flat 30% tax on a gross basis (meaning without the allowance of any deductions) on certain investment-type income commonly referred to as fixed or determinable annual or periodical income (“FDAPI“).FDAPI includes rents. Thus, under the FDAPI rules, the foreigner would be subject to the 30% tax on the full amount of the rental income.4

On the other hand, the United States taxes income effectively connected with the conduct of a U.S. trade or business (commonly referred to as “effectively connected income” or “ECI“) on a net basis at the same graduated federal rates that apply to U.S. taxpayers.5 Accordingly, if the foreigner actively engages in a rental real estate business, he or she can generally deduct expenses attributable to the property (e.g., maintenance and repairs, depreciation, etc.) in determining the amount of income subject to tax. In many cases, the availability of these deductions makes it beneficial for the foreigner to be subject to tax on the rental income under the ECI rules rather than the FDAPI rules (as the deductions allowable in the case of ECI may result in no taxable income). Whether or not a foreigner is considered to be engaged in a U.S. trade or business is a question of fact; however, an election known as the ‘net election’ is available that allows foreigners to choose to be subject to tax on the rental income under the ECI regime.6

In addition to taxing the rental income generated by the property, the United States will impose income tax when the foreigner sells the property. Under the Foreign Investment in Real Property Tax Act of 1980 (“FIRPTA“), gain or loss from the disposition of a U.S. real property interest (“USRPI“) is automatically treated as ECI and, thus, is subject to U.S. income tax on a net basis at the applicable federal rates.7 The gain will generally be eligible for long-term capital gains tax treatment, subject to tax up to the maximum rate of 20%, provided the individual owns the USRPI as a capital asset or a Code § 1231 asset for more than 1 year. The tax is collected through withholding, which acts as a credit toward the ultimate U.S. tax liability due.8

From an estate tax perspective, if the foreigner owned the U.S. real estate at death, his or her estate would be subject to tax, up to a maximum rate of 40%, on the fair market value of the property at the time of death.9 Unlike U.S. taxpayers who receive a significant exemption amount against the U.S. estate tax, foreigners only receive a credit of $13,000 for U.S. estate tax purposes, which effectively exempts the first $60,000 of a foreigner’s taxable estate from U.S. estate tax.10

Holding Structures

Having surveyed the basic U.S. taxation of foreign-owned U.S. real estate, we can now examine the traditional holding structures that have been used to produce favorable U.S. tax outcomes.11 The first is a corporate holding structure – specifically, the use of a foreign corporation to own U.S. real estate. The advantage of this structure is that, provided the appropriate corporate formalities are respected, the foreign corporation acts as a ‘blocker’ against the U.S. estate tax.12 In other words, instead of owning U.S. real estate directly, the foreigner owns shares of stock in a foreign corporation, an asset that has a foreign situs and is therefore not subject to U.S. estate tax in the case of a foreigner.13

The cost of obtaining U.S. estate tax protection, however, is unfavorable income tax treatment. By owning the real estate through a corporation, the foreigner loses the ability to receive preferential capital gains tax treatment on a sale of the property. Instead, gain from a sale (as well as any rental income from the property) is taxed at corporate rates, the top rate of which was 35% prior to 2018. Additionally, a second tax known as the “branch profits tax” could apply.14 A full discussion of the branch profits tax is outside the scope of this article; however, the tax is generally imposed at a rate of 30% on the “dividend equivalent amount” of a foreign corporation engaged in a U.S. trade or business. This tax is meant to mirror the tax that a foreign corporation would pay on a dividend received were its ‘branch’ operated as a U.S. corporate subsidiary. When the branch profits tax applies, the top effective federal tax rate for a foreign corporation is increased to 54.5%.15 To avoid the application of the branch profits tax, the foreign corporation could form a U.S. corporation to own the U.S. real estate (commonly referred to as a two-tier corporate structure).16

To achieve better income tax results, foreigners could instead choose to invest through a partnership structure. Under this approach, a foreign company treated as a partnership for U.S. tax purposes would own the U.S. real estate (or, as discussed below, a foreign partnership would own a U.S. partnership that would own the property – commonly referred to as a two-tier partnership structure). Similar to the case of individual ownership, gain on the sale of U.S. real estate in the case of a partnership structure is eligible for preferential long-term capital gains tax treatment at the maximum federal rate of 20%.17 The cost of obtaining preferential income tax treatment, however, is estate tax uncertainty.

The situs of a partnership interest for U.S. estate tax purposes has long remained an unsettled issue. This uncertainty involves the more basic question pervasive throughout the Code in the partnership setting – whether a partnership should be viewed under the aggregate theory (i.e., a collection of underlying assets) or the entity theory (i.e., an entity separate from its owners).18 Under both the aggregate and entity approach, it seems clear enough that an interest in a foreign partnership that holds no U.S. situs assets and conducts business outside of the United States is considered foreign situs for U.S. estate tax purposes. Where a partnership has some connection to the United States, however, the analysis may be obfuscated.

Under the aggregate approach, the situs of a partnership interest is based on the location of the assets of the partnership. The leading case supporting the aggregate approach is Sanchez v. Bowers,19 where the Second Circuit determined that the situs of a partnership interest was determined by the location of the underlying assets of the partnership. As commentators have noted, however, such a finding hinged on the fact that under local law, the partnership terminated at the death of the decedent.20 Had the partnership not terminated, the court reasoned, albeit in dicta, that the situs of the partnership interest could have been determined under a different theory (noting that a foreign entity could subject itself to U.S. taxation based on its U.S. business activities).21

Under the entity approach, it appears that the situs of a partnership interest can be based on the following options: (1) the domicile of the owner of the partnership interest; (2) where the partnership is legally organized; or (3) the location of the partnership’s trade or business. Case law may support option (1). In the Supreme Court decision of Blodgett v. Silberman,22 the Court determined that a partnership interest was intangible personal property, the situs of which is determined by the domicile of its owner.23 Treasury regulations may support option (2) under a ‘catch-all’ rule governing the situs of intangible property. In particular, intangible personal property the written evidence of which is not treated as being the property itself is considered to be situated in the United States if it is issued by or enforceable against a resident of the United States.24

The IRS appears to view option (3) as the correct method for determining the situs of a partnership interest – that is, if the death of the decedent does not terminate the partnership, the situs of the partnership interest is determined by the place where the partnership conducted its business.25 Accordingly, under this approach, if a foreigner owned an interest in a partnership that was engaged in a U.S. real estate business, such interest would be considered U.S. situs and subject to U.S. estate tax.26

Due to the foregoing uncertainty, a foreigner will need to tolerate a degree of estate tax exposure to achieve better income tax results with a partnership structure. A two-tier partnership structure (i.e., a foreign partnership that owns a U.S. partnership that owns U.S. real estate) may commonly be used in an attempt to bolster the position that the foreign partnership interest should not be considered a U.S. situs asset for estate tax purposes. The argument in the case of a two-tier partnership structure is that the foreign partnership should be viewed as owning an intangible asset not subject to U.S. estate tax. Absent further guidance from the IRS, however, the issue remains unanswered.

A third option exists for a foreigner looking to invest in U.S. real estate – a trust. Properly structured and administered, a trust can provide the best of both worlds, receiving capital gains tax treatment in the case of a sale and providing U.S. estate tax protection should the property still be owned by the trust at the foreigner’s death. Achieving these results comes at a price, however. Namely, the foreigner must be willing to part with control over the property for the trust to serve its intended purpose. For instance, the trust would, at a minimum, need to be irrevocable.27 Further, the trust must be carefully drafted and properly administered so as not to ‘taint’ the trust for U.S. estate tax purposes (e.g., the foreigner cannot have the ability to ‘control’ the trustee, such as by retaining the unrestricted power to remove and replace the trustee).28 Many foreigners may therefore not be willing to observe all of the rules and protocols required in the trust setting, even if it meant receiving favorable income and estate tax treatment.


The Act made a number of changes that will affect a foreigner’s decisions in choosing the ideal holding structure for an investment in U.S. real estate.

Changes in Tax Rates & the New 199A Deduction

Perhaps most notable is the change in U.S. corporate tax rates. Rather than being subject to a graduated tax structure at a top rate of 35%, corporations are now taxed at a flat rate of 21%.29 This change was made permanent by the Act, unlike some of the other changes, which sunset for taxable years beginning after December 31, 2025.

Not to leave out noncorporate taxpayers, the top income tax rate for individuals was lowered from 39.6% to 37%, although the maximum preferential long-term capital gains tax rate remains at 20%.30 The lower income tax rates for individuals sunset in 2026, when the rates will revert to previous levels. Additionally, the Act contains a deduction under new Code § 199A for noncorporate taxpayers operating certain businesses through pass-through structures. For taxable years beginning after December 31, 2017, and before January 1, 2026, noncorporate taxpayers may deduct up to 20% of their “qualified business income” from a pass-through entity (i.e., a partnership, sole proprietorship, etc.). Qualified business income generally means the amount of qualified items of income, gain, deduction, and loss with respect to a taxpayer’s qualified trade or business. As an initial threshold, only those items that are effectively connected with the conduct of a U.S. trade or business are eligible for the deduction. Assuming that a taxpayer qualifies for the full 20% deduction, the top income tax rate on the qualified business income is effectively lowered from 37% to 29.6%.31

While a full discussion of the new Code § 199A deduction is outside the scope of this article, it should be noted that various limitations apply to limit the amount of the deduction in certain cases. For instance, in the case of certain high-income taxpayers, the deduction is limited to the greater of (i) 50% of the taxpayer’s share of W-2 wages with respect to the qualified trade or business, or (ii) the sum of 25% of the taxpayer’s share of W-2 wages with respect to the qualified trade or business, plus 2.5% of the taxpayer’s share of the unadjusted basis immediately after acquisition of all qualified property of the business.32 Moreover, for all taxpayers, an overall limitation of 20% of taxable income (excluding capital gain) applies.33 Special rules apply in the case of a “specified service trade or business” or “the trade or business of performing services as an employee.”34

Limitations on Interest Expense and Net Operating Losses

New limits on the deduction for a business’s interest expenses are also relevant. Previously, corporations had to contend with the ‘earnings stripping’ rules of old Code § 163(j), under which a deduction for interest paid could be disallowed under certain circumstances (e.g., if the corporation was too heavily leveraged). Under new Code § 163(j), which generally applies to all types of taxpayers (not just corporations), a business’s net interest expense is limited to 30% of the business’s adjusted taxable income.35 Amounts disallowed under the foregoing rules are carried forward indefinitely and treated as interest expense in succeeding taxable years. Exceptions to the foregoing 30% limitation do apply, however, in the case of certain small businesses (a business with average annual gross receipts of $25,000,000 or less for the preceding three years) and certain electing real property businesses.

The Act also changes the rules regarding the net operating loss (“NOL“) deduction. Previously, NOLs were fully deductible (meaning they could generally be used to offset 100% of taxable income), subject to certain limits under the alternative minimum tax rules.36 Unused NOLs could also be carried back 2 years and carried forward 20 years. Now, however, the NOL deduction is limited to 80% of the taxpayer’s taxable income. Furthermore, NOL deductions may no longer be carried back 2 years. Rather, unused NOL deductions can only be carried forward (albeit indefinitely).

Expansion of S Corporation Rules

One of the Act’s lesser-known changes involves the rules governing beneficiaries of an electing small business trust (“ESBT”). An ESBT is one of the few types of trusts that may hold stock in an S corporation. Under long-standing U.S. tax rules, foreigners could not be shareholders of an S corporation (if they were, the corporation’s S election terminated). Prior to the Act, foreigners could also not be potential current beneficiaries of an ESBT, meaning in general that they were not eligible to receive distributions from the ESBT, among other things. Now, however, foreigners can be potential current beneficiaries of an ESBT, which means that foreign individuals can now be indirect shareholders of S corporations.37 Even with this new rule, however, foreigners may still not be direct shareholders in an S corporation. Thus, care must be taken in the drafting of the trust agreement and the administration of the trust so as not to run afoul of this restriction.

Increased Estate & Gift Tax Exemption Amounts

Finally, the Act increased the estate and gift tax basic exclusion amount to $10,000,000, indexed annually for inflation ($11.18 million in 2018).38 This increase will sunset in 2026, when the exclusion amount will return to previous levels (i.e., $5,000,000, with inflationary adjustments).

What the Act Did Not Change

Perhaps more important than the changes made by the Act are the changes that were not made by the Act. For example, the Act did not extend the increased estate and gift tax exemption amounts to foreigners, who receive no exemption amount for U.S. gift tax purposes,39 and only receive an exemption amount of $60,000 for U.S. estate tax purposes.40

Additionally, FIRPTA remains almost entirely unchanged by the Act (certain changes were made to reflect the new tax rates, but the substance of the rules remains the same). Likewise, dividends received from U.S. corporations are still subject to a 30% withholding tax in the case of a foreigner (or a reduced treaty rate, if available). Foreign corporations operating a U.S. business in branch form also remain subject to the branch profits tax just as such corporations did prior to the Act. The portfolio interest exemption, which allows certain foreign lenders to receive U.S. source interest free of U.S. withholding tax if certain requirements are met, remains intact.41 The Act also did nothing to change the current situs rules that apply for transfer tax purposes in the case of a foreigner.42


What does all of the foregoing mean for a foreigner who is considering an investment in the U.S. real estate market? Like most questions involving U.S. tax law, the answer is, it depends.

Based solely on a federal income tax rate analysis, partnership holding structures (and trusts) generally remain more efficient than corporate structures, although not necessarily by much. Let us examine a common scenario were a foreigner purchases an apartment to be used solely for personal purposes while vacationing in the United States.43 The foreigner decides to sell the apartment after a few years. In the two-tier corporate holding structure, a sale by the lower-tier U.S. corporation will be taxed at 21%.44 Thereafter, the after-tax sales proceeds can generally be distributed tax-free as a liquidating distribution to the foreign parent corporation.45 On the other hand, in a two-tier partnership structure, a sale by a U.S. partnership will be taxable at preferential long-term capital gains rates up to the top rate of 20%.46

Accordingly, one can see that in the case of a foreigner who holds U.S. real estate solely for personal use, a flow-through structure remains slightly more income tax efficient. Given the uncertainty surrounding the treatment of partnership interests for U.S. estate tax purposes, it may well be worth it to the foreigner to implement a corporate structure, which would result in a higher income tax liability if the property were sold, to achieve the security of U.S. estate tax protection. Foreigners may also note that a corporate structure acts not only as an estate tax blocker, but also as a ‘filing’ blocker for income tax purposes. In other words, when a U.S. corporation sells the property, the corporation itself is responsible for filing a U.S. income tax return.47 In the case of a partnership structure, however, the partners of the foreign partnership will be required to file a U.S. income tax return.

Instead of a vacation home as an investment, let us now assume that the foreigner will invest in U.S. commercial real estate and wants to receive annual distributions of all of the company’s earnings and profits. Due to the double taxation that occurs with corporations, a two-tier corporate structure results in a total effective federal tax rate of 44.7% imposed on the earnings generated by the investment.48 In the case of a partnership structure, those same earnings are subject to tax only once up to a maximum federal rate of 37%. If, however, the full 20% deduction is available with respect to the foreigner’s share of the income from the partnership, the top effective federal income tax rate is lowered to 29.6%.49 Accordingly, the traditional income tax inefficiency of the corporate structure becomes more apparent in the case of a commercial investment where the foreigner wants to receive current distributions of the earnings and profits.50

In structuring a U.S. real estate investment, the effects of applicable income and estate tax treaties should be kept in mind. For example, many treaties reduce the U.S. withholding tax imposed on U.S. source dividends. Additionally, an applicable estate tax treaty may effectively increase the estate tax exemption amount available to a foreigner. Accordingly, foreigners from treaty jurisdictions should consider available treaty benefits in selecting an investment structure.51

While corporate and partnership holding structures may remain the two most common forms of ownership for the foreigner who desires to invest in U.S. real estate, trusts should not be overlooked. From an income tax perspective, a trust is generally taxed at the same federal rates that apply in the case of a partnership structure, including the maximum preferential long-term capital gains tax rate of 20%.52 From an estate tax perspective, a trust, if properly structured and administered, can provide the same protection as a foreign corporation. Accordingly, for the foreigner willing to part with control over the investment, a trust may provide the ideal holding structure.

It remains to be seen what effect the new ESBT rules will have on the choice of holding structure for the foreigner. One of the eligibility requirements for an ESBT is that the trust must be a domestic trust (meaning, in general, that all substantial decisions of the trust must be controlled by U.S. persons, and the trust must be governed by U.S. law).53 While likely the case that there would be no need for a foreigner to utilize this option if he seeks advice far enough in advance, for those corporate structures already existing, the ESBT may now serve as a method by which a C corporation could convert to an S corporation and not lose its S status due to a foreign shareholder, thereby providing flow-through taxation somewhat similar to a partnership structure. Additionally, the new rules could prove beneficial in the case of a family business structured as an S corporation where foreign family members were prevented from owning an equity stake in the business (or, in the alternative, where a U.S. family member was faced with the decision of having to give up his or her equity stake in order to expatriate).

Although not the focus of this article, post-mortem planning considerations (i.e., what to do after the foreigner dies) should also be considered. For example, if property is held through a foreign corporation and U.S. persons are to inherit the shares of the foreign corporation after the foreigner dies (perhaps through a trust), such ownership will generally result in adverse tax consequences for the U.S. persons.54 Likewise, U.S. beneficiaries of a foreign trust can also be subject to punitive U.S. income tax rules.55


While the Act represents a major piece of U.S. tax legislation, it is not necessarily a game-changer for foreign investment in U.S. real estate. From an income tax perspective, a partnership holding structure remains more efficient, particularly for investments where it is anticipated that there will be significant annual income and cash flow that will be distributed and the taxpayer qualifies for the new 20% deduction under Code § 199A. This income tax efficiency comes at the cost of some estate tax uncertainty. That being said, the gap in the income tax disparity between corporations and partnerships has narrowed, especially in the case of a foreigner who desires to purchase U.S. real estate solely for personal use.

Foreigners considering an investment in U.S. real estate should seek advice from qualified U.S. tax counsel in advance, as the planning opportunities that exist prior to the purchase may not be available to the foreigner who already owns U.S. real estate in his or her own name.

1 P.L. 115-97.  Due to procedural rules, the name of the Act was changed to “An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018.” This article, however, shall continue to refer to the legislation by its more commonly used name, the “Tax Cuts and Jobs Act” (the “Act“).

For purposes of this article, references to a “foreigner” mean an individual who is neither a U.S. citizen nor a U.S. resident for income or transfer (i.e., gift, estate, and generation-skipping transfer) tax purposes. Although the concept of residency differs for U.S. income and transfer tax purposes (residency is based on the concept of domicile for transfer tax purposes), such a discussion is outside the scope of this article.

Code § 871(a). All section (“§“) references are to the Internal Revenue Code of 1986, as amended (the “Code“), or the Treasury regulations thereunder, unless otherwise specified. All references to “tax” or “taxes” are to U.S. federal taxes, unless otherwise specified.

The tax is generally collected through withholding by the payor. Code § 1441.

Code § 871(b).

Code § 871(d).

Code § 897.

Code § 1445. The buyer is generally required to withhold 15% of the amount realized on the disposition and must report and remit this amount to the Internal Revenue Service (“IRS“). Various exceptions to the withholding rules apply, such as when the IRS issues a withholding certificate that reduces or eliminates withholding. This could occur, for example, when the seller’s maximum tax liability from the disposition is less than the withholding amount. Treas. Reg. § 1.1445-3(c). Utilizing the foregoing exception requires approval from the IRS (generally, by filing Form 8288-B, Application for Withholding Certificate for Dispositions by Foreign Persons of U.S. Real Property Interests).

Code § 2101. U.S. real estate is considered a U.S. situs asset for estate tax purposes and, therefore, is includible in a foreigner’s gross estate. Treas. Reg. § 20.2104-1(a)(1). The effects of debt encumbrances on the real estate depend on whether the debt is recourse or nonrecourse. In the case of recourse debt, a proportionate deduction is allowed based on the value of U.S. situs assets compared to the value of the decedent’s worldwide assets. Code § 2106(a)(1); Treas. Reg. § 20.2053-7. In order to claim such deduction, however, the estate must disclose the decedent’s worldwide assets on Form 706-NA, United States Estate (and Generation-Skipping Transfer) Tax Return. Nonrecourse debt, on the other hand, is fully deductible (i.e., only the net equity value of the property is includible in the decedent’s gross estate). See Estate of Johnstone v. Commissioner, 19 T.C. 44 (1952) (“If a particular debt can be collected only from property mortgaged to secure the debt and not from the estate generally, the full amount of the debt should be excluded even in the case of a nonresident alien, but if it can be collected from the estate generally, and a part of that estate is not being taxed in the United States, then it is appropriate to allow only a proportionate part of the debt to be deducted.”).

10 This amount may be increased under an applicable estate tax treaty.

11 It should be noted that with each structure, ideally the foreigner would have sought tax advice prior to purchasing the U.S. real estate, and, likewise, would have formed the holding structure prior to entering into any purchase contract. Unfortunately, however, we do not live in an ideal world. Foreigners may often find themselves in the position of seeking advice on how to restructure their direct ownership interest into a more U.S. tax efficient vehicle. A discussion of these restructuring techniques is outside the scope of this article; however, it should be noted that the considerations that apply in that situation are different from those applicable to a foreigner who forms a structure in advance of a purchase.

12 See generally Fillman v. U.S., 355 F.2d 832 (Cl. Ct. 1966) (outlining circumstances where the corporation’s separate existence was not appropriately respected).

13 Treas. Reg. § 20.2105-1(f).

14 Code § 884.

15 State income taxes could also apply in addition to federal income tax.

16 The branch profits tax may also be reduced or eliminated by an applicable income tax treaty.

17 As a ‘flow-through’ entity, the partnership itself is not subject to U.S. income tax. Rather, gain realized by the partnership flows through to the partners, who are taxed on the income.

18 This article merely surveys some of the approaches in determining the situs of a partnership interest for U.S. estate tax purposes. For a more comprehensive discussion, see Cassell, Karlin, McCaffrey & Streng, U.S. Estate Planning for Nonresident Aliens Who Own Partnership Interests, 99 TAX NOTES 1683 (June 16, 2003). See also Hudson,The U.S. Tax Effects of Choice of Entities for Foreign Investment in U.S. Real Estate and Businesses and the Taxation of Dispositions of U.S. Partnership Interests (materials from the 34thAnnual International Tax Conference, Miami, FL, Jan. 7-8, 2016).

19 70 F.2d 715 (2d Cir. 1934).

20 See, e.g., Kapur Sanna, Calling for Clarity on NRA’s Partnership Situs, Tr. & Est. (Nov. 1, 2009).

21 Sanchez, 70 F.2d at 718.

22 277 U.S. 1 (1928).

23 See also Estate of Vandenhoeck, 4 T.C. 125 (1944). It is generally thought that this position is based on the common law maxim of mobilia sequunter personam (meaning, movable property follows the person). As some commentators have pointed out, however, this may be an erroneously broad reading of these decisions. See, e.g., M. Annette Glod, United States Estate and Gift Taxation of Nonresident Aliens: Troublesome Situs Issues, 51 Tax Law 109, 112-113 (1997).

24 Treas. Reg. §§ 20.2104-1(a)(4), 301.7701-5. Several commentators have criticized this approach, however. See, e.g., Heimos, 837-3rd T.M., Non-Citizens — Estate, Gift and Generation-Skipping Taxation, at IV.D.

25 Rev. Rul. 55-701, 1955-2 C.B. 836.

26 The IRS’s position was stated in authority that is now over 60 years old, however, and as some commentators note, the IRS ruling was based on the application of the estate tax treaty then in effect between the United States and the United Kingdom. See Caballero, Feese, and Plowgian,912-2nd T.M., U.S. Taxation of Foreign Investment in U.S. Real Estate, at VI.C. See also Kapur Sanna, supra note20; Heimos, supra note 24.

27 Code §§ 2104(b), 2038.

28 See Treas. Reg. §§20.2036-1(b)(3), 20.2038-1(a). See also Rev. Rul. 95-58, 1995-2 C.B. 191.

29 State income taxes are separate and may be imposed in addition to federal income tax.

30 While the 3.8% net investment income tax remains applicable in the case of U.S. taxpayers, the tax does not apply to a foreigner. Code § 1411(e)(1).

31 This is the top rate of 37% less the product of 37% multiplied by the 20% deduction (i.e., 80% of 37%).

32 Code § 199A(b)(2)(B). The threshold amount above which the limitation begins to apply is $157,500, or $315,000 in the case of a joint return.

33 Code § 199A(a)(1)(B).

34 In general, a specified service trade or business means any trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, and brokerage services, among others. Code § 199A(d).

35 For this purpose, adjusted taxable income is computed without regard to certain deductions such as the deductions for non-business items, the deduction for net interest expense, any net operating loss deduction, and any deductions for depreciation, amortization, or depletion. Beginning in 2022, adjusted taxable income is calculated after taking into account deductions for depreciation, amortization, and depletion. Therefore, starting in 2022, the interest deduction limitation becomes stricter because it is measured by reference to a smaller tax base.

36 Code § 56(d).

37 Code § 1361(c)(2)(B)(v).

38 Rev. Proc. 2018-18, 2018-10 IRB 392.

39 Foreigners do receive the same annual exclusion amount as U.S. taxpayers ($15,000 for gifts of present interests made in 2018), and in the case of a gift to a non-U.S. citizen spouse, a foreigner receives a special annual exclusion of $152,000 for gifts made in 2018.

40 In certain cases, a foreigner may be able to benefit from the increased amounts if he is resident in a country with which the United States has a transfer tax treaty in effect (e.g., Germany).

41 As some commentators have noted, however, other rules enacted by the Act may affect how the exemption applies to certain financing structures. See, e.g., Jennifer Ray, An Inadvertent Change to Portfolio Interest Rules Under the TCJA, 158 TAX NOTES 821 (Feb. 5, 2018).

42 Certain income tax rules were enacted regarding sales by foreigners of interests in partnerships that own U.S. assets. See Code § 864(c)(8). While a discussion of these rules is outside the scope of this article, these rules essentially represent a codification of the IRS’s prior viewpoint on the subject. See Rev. Rul.91-32, 1991-1 C.B. 107. New withholding rules also apply to a foreigner’s disposition of partnership interests. See Code § 1446(f).

43 For purposes of this discussion, issues such as whether or not the foreigner is required to pay a fair market rental value for use of the property are generally disregarded. For a discussion of these issues, see Kapur Sanna and Ziobrowski, Foreign-Owned U.S. Real Estate: To Rent or Not to Rent, 41 Estate Planning 3 (Apr.2014).

4State income taxes are not focused on in detail in this article but should also be considered. For example, Florida imposes a 5.5% income tax on corporations, which is deductible for purposes of calculating the federal tax base. Taking into account the 5.5% corporate state income tax, a sale of Florida property would be taxed at an effective blended rate of approximately 25.34%.

45 Code § 897(c)(1)(B). This rule is commonly referred to as the ‘FIRPTA cleansing exception.’

46 The same capital gains rate would apply in the case of a sale by a trust; however, trusts are taxed under the ‘compressed’ rates of Code § 1(e), meaning that a trust is subject to the top marginal federal tax rate at lower income levels.

47 The foreign parent holding company, however, along with the foreigner, will be disclosed as direct and indirect owners of the U.S. corporation on the U.S. corporation’s income tax return. See IRS Form 1120, Schedule G.

48 I.e.,a 21% corporate level tax, leaving 79% of the earnings left to distribute to the foreign shareholder, and a 30% withholding tax imposed on such after-tax earnings (21% + (79% x 30%)). State income taxes may apply in addition.

49 It should be noted that the 20% deduction would not be available when the property is sold, as capital gains are not a qualified item of income. Code § 199A(c)(3)(B)(i).

50 If, however, the earnings of the company were reinvested (in the case of a corporate structure), lower federal income tax may result (i.e., the 30% withholding tax would not apply since there would be no distribution of earnings).

51 The United States has entered into over 60 income tax treaties with various countries. A list of such treaties can be found at The United States has entered into a much smaller number of estate tax treaties.

52 Trusts, however, are taxed under the compressed rate schedule of Code §1(e), meaning that a trust is subject to the top marginal federal tax rates at lower income levels.

53 Code §§ 1361(c)(2), 7701(a)(30)(E).

54 The Act eliminated the requirement that a foreign corporation be a controlled foreign corporation (“CFC“) for an uninterrupted period of 30 days in order to trigger subpart F inclusions in the case of U.S. shareholders. This change will affect traditional post-mortem planning techniques involving check-the-box elections for foreign holding companies.

55 See generally Code §§ 665-668 (commonly referred to as the “throwback rules“).

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