Estate tax considerations for non-US persons owning US real estate

Editor: Mo Bell-Jacobs, J.D.

Non–U.S. persons face complicated and often surprising tax and compliance issues when acquiring or holding real estate located in the United States. Challenges include transfer tax (i.e., estate, gift, and generation–skipping taxes) and income tax regimes as well as the compliance burdens associated with those regimes. The following discussion primarily addresses transfer tax considerations and planning while touching on a few income tax implications. For purposes of this item, the terms “non–U.S. person” and “nonresident nondomiciliary individual” (NRND individual) denote an individual who is neither a resident for estate and income tax purposes nor a U.S. citizen.

US estate and gift tax rules

A critical aspect of transfer tax planning for non–U.S. persons with U.S. real estate involves understanding the U.S. estate and gift tax rules. Unlike U.S. persons (either through domicile or citizenship), who are subject to U.S. estate tax on their worldwide assets, non–U.S. persons are taxed only on assets situated within the United States, including U.S. real estate (Sec. 2103 and Regs. Sec. 20.2104–1(a)(1)). Similarly, for gift tax purposes, domiciled individuals are taxed on worldwide transfers, whereas NRND individuals are taxed only on transfers of tangible property located in the United States (Sec. 2501(a)(2)).

Additionally, NRND individuals do not benefit from the exemptions and credits available to U.S. persons. Generally, the estate tax exemption for non–U.S. persons is only $60,000 (not adjusted for inflation), drastically lower than the current exemption of $13.99 million for U.S. persons in 2025 (Secs. 6018(a)(2) and 2010(c)(3)). Moreover, the marital deduction may not be available for transfers to non–U.S. persons. As a result, non–U.S. persons owning real estate in the United States can easily trigger an estate tax liability and the associated compliance burden.

Planning for NRND individuals with real estate is complex and requires a detailed review of applicable U.S. and state tax rules, treaties, and filing requirements to ensure optimal tax outcomes.

Residence and domicile for estate and gift tax purposes

A foreign person’s classification as a resident or nonresident for estate and gift tax purposes is based on their domicile. For estate and gift tax purposes, the concept of domicile is pivotal and contrasts with the income tax test for residence, which depends on days present in the United States and immigration status. Under Regs. Sec. 20.0–1(b), a person is considered to have domicile in the United States if they live in the United States, even briefly, with no intention of leaving. If there is no intent to stay, a person has not established domicile in the United States. This test for domicile is subjective and is typically based on the particular facts and circumstances of each individual’s situation.

Estate tax considerations

For U.S. estate tax purposes, an NRND individual’s gross estate consists of all property situated in the United States in which the decedent had an interest at the time of death (Sec. 2103). U.S.-situs property includes assets located in the United States that are tangible and intangible, such as real estate, shares of stock in U.S. corporations and debt obligations, property transferred within three years of death (Secs. 2104 and 2035—2038), and deposits with domestic branches of foreign banks (Sec. 2104). Deductions allowed from the gross estate include expenses, losses, indebtedness, certain prior paid taxes, transfers for charity, gift tax payments, etc. (Sec. 2106).

NRND individuals are subject to a maximum 40% estate tax on U.S.-situs assets (see Sec. 2101(a)). Despite the $60,000 estate tax exclusion amount noted above, certain estate tax treaties between the United States and other countries may provide a higher exemption. This exemption, based on the value of the U.S.-situs assets relative to the worldwide estate, is often equal to a fraction of the much higher $13.99 million exemption available to residents based on the value of the U.S.-situs assets relative to the worldwide estate.

Regardless of any applicable treaty, NRND individuals may be required to file Form 706–NA, United States Estate (and Generation–Skipping Transfer) Tax Return, Estate of Nonresident Not a Citizen of the United States, when the amount of U.S.-situs assets exceeds $60,000 at the time of death. Often, the NRND individual’s estate tax return will need to report information on the worldwide estate, not just the U.S.-situs assets subject to taxation. The value of the worldwide estate is necessary to allocate deductions and calculate any enhanced credits (e.g., estate tax lifetime exclusion) allowed under a treaty (see Sec. 2106(a)).

Of particular note, the value of U.S. real estate includible in the gross estate may not be reduced by the entire value of mortgage debt associated with the real estate but only the portion of such debt that bears the same relationship of the value of U.S.-situs assets’ relative value to the worldwide estate — unless the estate is not liable for the indebtedness (i.e., the mortgage is nonrecourse) (Sec. 2106(a)(1) and Regs. Sec. 20.2053–7). Thus, an NRND individual may be caught by surprise by the extent to which deductions are unavailable to offset the taxable estate and the compliance burden of reporting the worldwide estate on Form 706–NA.

Additionally, a transfer certificate from the IRS may be required to release the U.S. assets from third parties, such as financial institutions and title companies. Often, a transfer certificate will be issued only after acceptance of Form 706–NA, which can take several months or years. Thus, the compliance burdens and costs are often just as important as the estate tax liabilities.

Gift tax considerations

Generally, the same situs rules that apply to NRND individuals for estate taxes also apply for gift tax purposes, except that an NRND individual is subject to gift tax only on the gratuitous transfer of real and tangible property situated in the United States. Thus, gifts of intangible property such as marketable securities, even if connected with the United States, are not subject to tax (Sec. 2501(a)(2)). This distinction between tangible and intangible property is important for gift planning for nonresident persons.

NRND individuals are subject to a maximum 40% gift tax per year on transfers over the annual exclusion, $19,000 for 2025 (Sec. 2503(b)). The unlimited marital deduction is generally not available for gifts to noncitizen spouses (Sec. 2523(i)). However, gifts to non–U.S.-citizen spouses are allowed a higher gift tax exclusion amount, $190,000 in 2025 (Sec. 2523(i)(2)). Unlike U.S. residents or domiciliaries, NRND individuals do not have the benefit of a lifetime exemption on lifetime gifts of U.S. tangible property. NRND individuals are generally required to file Form 709, United States Gift (and Generation–Skipping Transfer) Tax Return, if transfers of tangible U.S.-situs property are made during the tax year.

Maximizing estate planning opportunities for NRND individuals hinges on a thorough understanding and strategic application of these rules and applicable tax treaties.

Treaty application

Nonresident persons owning real estate in the United States must consider both the U.S. estate and transfer tax laws and any applicable estate and gift tax treaties. Additionally, the tax laws of the NRND individual’s home country play a crucial role in determining the effectiveness of estate planning strategies. The United States has estate and gift tax treaties with 15 countries that can provide significant benefits, such as enhanced exemptions and credits.

Estate tax treaties provide relief from U.S. taxation in different ways. Any planning should align with the specific method of relief provided in the treaty. There are two general types of transfer tax treaties, and some treaties may or may not work with certain planning strategies. The older situs–type treaties specifically designate which types of assets may be taxed by the country of situs of the assets. These treaties assign situs for specific types of assets. For instance, situs–type treaties generally treat shares in a corporation organized in the United States as U.S.-situs property. The situs rule in situs–type treaties for certain types of property is often no different from the U.S. statutory rule.

On the other hand, domicile–type treaties generally assign taxation to the country of domicile, citizenship, or residency of an individual and typically provide a few narrow exceptions allowing for estate taxation by the nonresident country of real estate and operating businesses located in the nonresident country. The latter type of treaty often accommodates better and simpler planning options.

In addition to changing the U.S. situs rules, many treaties provide additional relief by enhancing the credit or lifetime exemption available to the NRND individual from the low $60,000 exemption generally available. For NRND owners of U.S. real estate, this relief may be essential, especially if the worldwide estate is near or below the U.S. lifetime exemption.

Planning strategies

Careful planning prior to the acquisition of real estate in the United States can eliminate an estate tax liability on foreign–owned real estate located in the United States. Planning options include holding the U.S. real estate through legal entities or trust structures. The appropriate vehicle for holding the U.S. real estate will depend on a number of factors, including the availability of a transfer tax treaty; the specific treaty provisions; the intended use of the real estate (e.g., investment, business, or personal use); income tax considerations; and tax considerations in the NRND individual’s home jurisdiction. Due to the multiple factors, there is no common solution for foreign–owned real estate, and a careful analysis of the taxpayer’s circumstances should be performed.

Corporate blockers: One method for preventing the application of U.S. estate taxes is to hold the real estate through a corporate entity. Absent an estate tax treaty providing otherwise, stock in a U.S. corporation is U.S.-situs property includible in the taxable estate of an NRND individual (Sec. 2103). However, a foreign corporation can be used as a vehicle to hold the real estate without triggering a potential U.S. estate tax liability. This structure is often called a blocker corporation because it blocks application of the estate tax on the real estate. Residents of countries that do not have an estate tax treaty with the United States frequently use foreign blocker corporations.

Owning U.S. real property for rental purposes will generate taxable income, subjecting the owner to federal income tax and withholding, either on a gross basis or as effectively connected income subject to taxation on a net basis. The Foreign Investment in Real Property Tax Act of 1980, P.L. 96–499, will subject the gain on the disposition of real estate by a foreign corporation to taxation. If such property is held by a foreign corporation, the income could also be subject to the branch profits tax on the after–tax earnings. The imposition of the branch profits tax on foreign corporation earnings may render foreign blocker corporations inefficient from an overall tax perspective. Corporations often introduce a second level of taxation, either upon distribution or under the branch profits tax.

Owning U.S. property through domestic (U.S.) corporations can be advantageous if an estate tax treaty provides that only the country of residence may tax the shares. Not all estate tax treaties would result in such treatment. Generally, transfer tax treaties that provide that the country of domicile has the exclusive right to tax its residents’ estates except where the treaty specifically allows the nonresident country to tax certain assets (i.e., domicile–type treaties) often override the general rule that stock in a U.S. corporation owned by a nonresident’s estate is subject to estate tax. On the other hand, situs–type treaties would not provide relief from U.S. estate taxation of stock in a U.S. corporation. As with foreign corporations, domestic corporations could introduce a second level of taxation.

In addition to the income tax considerations, corporate structures may involve greater administration costs. The personal use of U.S. real estate by an NRND individual may result in a taxable dividend (see G.D. Parker, Inc., T.C. Memo. 2012–327). Paying rent under a lease agreement may be necessary to maintain the structure. Also, corporations are subject to formalities including registration, board meetings, board resolutions, and other attributes that will add to the costs of maintaining the structure. These obligations should be considered when implementing the corporate structure. The failure to adhere to the formal requirements could compromise the effectiveness of the blocker in preventing a U.S. transfer tax liability.

Partnerships: Another possibility for eliminating the application of estate taxes on U.S. real estate could be holding the real estate through an entity classified as a partnership for U.S. income tax purposes. Due to the absence of clear guidance and authorities, there is considerable uncertainty as to whether an interest in a partnership holding real property is a U.S.-situs asset. As a result, holding U.S. real estate through a partnership entity may not provide the certainty desired. However, depending on the terms of any estate tax treaty available, under certain circumstances, an entity classified as a partnership may be an appropriate vehicle for holding the real estate.

There are a few authorities that practitioners may rely on when using partnership structures to prevent U.S. estate taxation on U.S. real property owned by an NRND individual. The IRS guidance dates back to a revenue ruling from 1955: Rev. Rul. 55–701. In that ruling, the IRS, in applying the U.S.-U.K. estate tax treaty applicable at the time, determined that thesitus of a partnership interest depended on where the partnership conducts its business and not the location of the underlying partnership assets. In essence, the ruling treated the partnership in that case as a separate entity and the interest in the partnership as an asset distinct from the underlying assets.

In the ruling, the IRS cited the Supreme Court case Blodgett v. Silberman, 277 U.S. 1 (1928). Blodgett involved a dispute over the constitutionality of the Connecticut estate tax’s application to a resident’s interest in a New York limited partnership holding real estate located in New York. In its holding, the Supreme Court characterized the partnership interest as an intangible asset and not an interest in the underlying real estate, which would not have been subject to the Connecticut transfer tax. The Blodgett ruling treated the partnership interest as an asset distinct from the underlying partnership assets. A possible extension of the rationale in Blodgett, arguably, is that the situs of a partnership interest does not depend on the situs of the underlying assets. It is important to note that certain partnership arrangements that terminate on death may not receive the same entity treatment as in Blodgett (see Sanchez v. Bowers, 70 F.2d 715 (2d Cir. 1934)).

In Rev. Rul. 55–701, the IRS extended the Blodgett rationale to rule that thesitus of a partnership asset is where the partnership carries on its business. However, the location of the business may not be so easily determined. Another, more recent case that may support the position that the situs of a partnership interest is not necessarily the location of any underlying real estate is the Tax Court case Pierre, 133 T.C. 2 (2009). In Pierre, the court held that a transfer of an interest in a disregarded single–member limited liability company (LLC) is a transfer of the LLC interest and not of the underlying assets.

While these cases provide some support that an interest in a partnership that holds U.S. real estate is not necessarily a U.S.-situs asset, there is not much guidance on how to assign situsto partnership interests. Since the rulings and cases treat partnership interests as intangible property, the regulations addressing the situs of intangible property may shed some light on the issue; however, neither the Code nor the regulations specifically address partnership interests. Regs. Sec. 20.2104–1(a)(4) provides that intangible personal property (other than certain certificated interests) is U.S.-situs property if it is issued by or enforceable against a resident of the United States. The opposite is true for such property issued by a nonresident of the United States (Regs. Sec. 20.2105–1(e)). The regulations provide that an entity classified as a partnership is resident in the country in or under which it is created or organized (Regs. Sec. 301.7701–5(a)). Arguably, under the regulations, interests in partnerships that are created or organized outside the United States and under foreign law would not be a U.S.-situs asset, but this application is not very reliable without further guidance. Significant uncertainty remains with the estate taxation of partnership interests held by NRND individuals. This uncertainty makes it difficult to plan and use partnerships for the real estate holdings of NRND individuals. However, there are some techniques that could minimize the risk of estate tax inclusion. Structuring a partnership interest to be assigned situs according to the partner’s residence may bolster a position that it is not a U.S.-situs asset. For instance, the use of certificated partnership interests held outside the United States may help to classify a partnership interest as a non–U.S.-situs tangible asset.

Moreover, when applicable and with the right provisions, a domicile–type treaty may enable an NRND individual to hold U.S. real estate through an entity classified as a partnership with more confidence that such an interest will not be subject to U.S. estate tax. As noted above, under U.S. law, the situs of a partnership interest is uncertain and may depend on where the partnership conducts its trade or business or other factors, which are not easily applied. A domicile–type treaty may reduce this uncertainty. The cases discussed above treat a partnership interest as an intangible asset distinct from the underlying assets. Domicile treaties allow only the residence jurisdiction of the individual to tax assets, except for, generally, directly held real estate and business assets located in the nonresident jurisdiction. Since domicile–type treaties often do not allow for taxation of partnership interests by the nonresident country, a partnership structure may effectively block the imposition of U.S. estate tax. Thus, when the right domicile–type treaty is available, partnerships can be a fairly simple and income–tax–efficient way to hold U.S. real estate while addressing the risk of a U.S. transfer tax liability.

It is important to review each treaty in detail. For instance, the U.S.-Germany estate and gift tax treaty, a domicile–type treaty, specifically allows the United States to apply estate taxes to partnerships owning U.S. real estate to the extent the value of such an interest is attributable to U.S. real estate or business property of a permanent establishment (Article 8 of Convention Between the United States and the Federal Republic of Germany for the Avoidance of Double Taxation With Respect to Taxes on Estates, Inheritances, and Gifts). While the combination of a partnership structure and domicile–type treaty may work well to reduce the risk of estate tax on the underlying U.S. real estate, be wary of any such exception in the applicable treaty. As a matter of treaty interpretation, the inclusion of this provision in the U.S.-Germany transfer tax treaty suggests that partnership interests are generally not taxable in the nonresident country under similar domicile–type treaties except where specifically provided.

Trusts: Trusts can be an efficient vehicle for holding nonpersonal U.S. real estate. Personal use typically will cause taxation of the real estate. For example, if a U.S. beneficiary uses real estate held by a foreign trust rent–free, the fair rental value may be treated as a distribution to the beneficiary and potentially taxable (Sec. 643(i)(1)). Additionally, if the grantor uses the U.S. real estate, the personal use could cause gross estate inclusion under Sec. 2036. Thus, trusts may be better suited for investment real estate.

For NRND individuals from nontreaty countries, trusts, either foreign or domestic, can provide estate tax exclusion that otherwise may not be available or practicable with corporate or partnership structures; however, careful planning is required to avoid unintended estate inclusion, income tax liabilities, and compliance burdens. Special care must be taken in funding the trust to avoid making a taxable gift of U.S.-situs real estate.

Tailoring the approach

U.S. real estate ownership by NRND individuals presents complex transfer tax challenges. Strategies to mitigate transfer taxes often involve converting U.S.-situs property into non–U.S.-situs or treaty–favored assets, such as through foreign or domestic corporations, partnerships, or trusts. However, each structure has its limitations and advantages depending on the specific circumstances. Planning for NRND individuals requires careful consideration of U.S. tax rules, applicable treaties, the limited estate tax exemption, and filing requirements. A tailored approach is crucial to optimize tax outcomes and ensure compliance.

Editor

Mo Bell-Jacobs, J.D., is a senior manager with RSM US LLP.

For additional information about these items, contact the author(s) at the email address(es) below.

Contributors are members of or associated with RSM US LLP.

Authors

From Douglas Borg, CPA, J.D., LL.M., TEP (Douglas.Borg@rsmus.com), Baltimore, and Rachel Ruffalo, J.D., LL.M. (Rachel.Ruffalo@rsmus.com), Miami