United States estate tax on non-Americans who invest in U.S. real estate
Non-Americans have invested significant amounts in U.S. real estate since 2008 and continue to invest at present. One of the major concerns such non-American investors have involves U.S. estate tax.
In a nut shell, any “U.S.-based asset” that a non-American owns at death is subject to estate tax. And the tax is draconian. The first $60,000 of the U.S.-based asset’s value (measured at the time of death) is tax free. After that, the tax rate starts at 20% on the value above $60,000, reaching 40% where the assets are valued over $1,000,000
Example: Assume that a British, French or German non-American (“Foreigner”) invested $2,000,000 in all cash, no mortgage, U.S. real estate deals. At the time of death, the properties are only worth $1,500,000. Despite the decline in value, estate tax is due on the value above $60,000 – or $1,440,000. And the estate tax due at death is a staggering $521,800!
What are “U.S.-based assets” that are subject to this harsh tax?
- U.S. real property
- Stocks and bonds issued by a U.S. entity.
So if the Foreigner owns U.S. real estate in his/her own name or via a private U.S. company (or if the person owns Google or Apple stocks or bonds), then estate tax applies to these assets at death.
What about if the Foreigner holds the interest in U.S. real estate via a U.S. LLC/partnership or via a non-U.S. company?
As to holding real estate through a non-U.S. company, if basic precautions are taken, estate tax will not generally apply as the Foreigner who passed away did not directly own the U.S. real estate. However, holding the real estate in a foreign corporation may have less favorable income or capital gains consequences if the real estate is sold prior to death.
And U.S. real estate holdings via an LLC or partnership? As LLCs are usually treated as partnerships under U.S. tax law, the analysis for LLCs and partnerships is identical. And the answer? Unknown. There is no clear answer as to whether the Foreigner who owns U.S-based assets via a partnership/LLC is subject to estate tax. However, having assisted numerous clients through IRS audits on this subject, one thing is clear – the IRS believes that estate taxes are due in these cases and puts up a fight.
So if you hold U.S. real estate (or shares in U.S. companies) in your own name or via an LLC/partnership what can you do to avoid estate tax?
Is it possible to transfer your investment by gift a day before death? No! The full name of the tax is estate and gift tax, and gifts are generally subject to gift tax – at the same rates as the estate tax.
Can the Foreigner transfer the real estate (or partnership/LLC interests) to a non-U.S. company and thus avoid estate tax?
Yes, but the transfer is deemed a taxable event under U.S. FIRPTA law (as possibly under the law where the Foreigner lives), and will generate U.S. (and possibly foreign) capital gains tax upon transfer.
What is the Foreigner who holds U.S. real estate (or stocks and bonds) in his/her personal name, or via an LLC/partnership to do? Here, attractive cost-effective solutions exist.
However, implementing them requires very careful planning. If carried out correctly, the investor can avoid future estate tax and do so in a manner that does not give rise to present capital gains.
Monte Silver is a U.S. tax attorney living in Israel and specializes in solving U.S. tax issues for people living outside the United States. He previously worked at the Estate & Tax division of the IRS and the U.S. tax court.
This article does not constitute legal advice.