US Estate Tax for Foreign Property Owners: What Each Way Out Actually Costs

Most foreign owners find this out by accident, years after buying.

If you are not a US citizen and not US-domiciled, your American property gets an estate tax exemption of $60,000. Meaning you can own US assets up to that value before your estate pays any tax. A US citizen gets roughly $15 million. Above that threshold the rate is graduated, from 18% up to 40%.

So a $274,000 rental leaves an estate tax exposure of about $65,960, on a property your family may have to sell to pay for.

The obvious answer is to find a more tax-efficient structure. Such structures do exist. But each one has a price, and the price is rarely set out next to the benefit.

One costs more in income tax than it saves. One stops you getting a mortgage at all. And moving your house into either is treated as a sale, so you pay tax on the growth to shift a house you are keeping.

This article prices each one. But planning is not pointless. It is just that for most people the cheapest answer is the one nobody talks about.

1. How much US estate tax would my family actually pay?

The exemption for a non-resident, non-citizen is $60,000. It was set in 1976 and never raised. Had it tracked inflation it would be several times that today.

A US citizen gets roughly $15 million. Same asset, same country, same tax. A gap of two hundred and fifty times.

The rate is graduated. It starts at 18% and only reaches 40% above $1,000,000 of taxable estate.

And here is the part almost every article gets wrong, including an earlier draft of this one.

The $60,000 is not a deduction you subtract before applying a rate. It is shorthand for a unified credit of $13,000 under section 2102(b)(1). The tax is calculated on the whole taxable estate using the graduated table, and the $13,000 is then taken off the answer. The reason people call it a $60,000 exemption is that $13,000 happens to be exactly the tax on $60,000.

That distinction matters because it changes the number. On her $274,000 property:

An effective rate of about 24% on the whole value, not 40%. Still a serious bill on a modest rental, and still one an American citizen taxpayer would not pay a penny of.

And a word on what to call it. Most non-Americans, and British and Canadian owners in particular, search for US inheritance tax. There is no such thing at federal level.

An inheritance tax is charged on the person who receives. An estate tax is charged on the estate before anything passes. The US taxes the estate. A few states have their own rules on top.

One thing worth being precise about, because it catches people. This is about domicile, not income tax residence. You can be a non-resident for income tax and still count as US-based for estate tax, if you have made America your permanent home. The two tests are different and are decided separately.

2. Which of my assets does the US tax on death?

The tax applies to your US-situs assets, and the IRS lists the main categories on its own page for nonresidents with US assets. For a property investor the obvious one is the real estate. There are two less obvious ones.

US shares are US-situs. Stock in a US company counts, wherever you hold it, whichever broker, whatever country you live in.

US-domiciled funds and ETFs are US-situs. A fund registered in the United States counts. The same strategy in an Irish-domiciled fund generally does not, which is why European investors often hold Irish versions of the same index. British owners ask the same question about pensions, and I have priced that out in can you hold US property in a SIPP.

So your actual estate tax exposure is usually bigger than people think. Take an owner with one $200,000 rental and a $150,000 US share account. That is $350,000 of US assets against a $60,000 exemption, and a bill well over $100,000. They think they have a property problem. They have a portfolio problem.

Shares in a foreign company are foreign-situs, whatever the company owns. That one fact is what the whole structuring industry is built on. British owners usually ask about the company they already have, which is a different question with a different answer, in can you buy US property in a UK limited company.

3. Does an LLC protect me from US estate tax?

This is the most common misconception in the subject, and the honest answer is less tidy than the confident one you will usually be given.

A single member LLC is disregarded for US income tax. The IRS looks straight through it and taxes the rent as though you held the house yourself. Which structure to use, and why an LP behaves differently, is set out in LP vs LLC for Canadians.

Estate tax is a different question, and no regulation settles it. The check the box rules say how an entity is classified for federal tax purposes. Nothing in them decides what your estate is holding when you die. On the gift tax side the IRS argued for looking straight through, and in the Pierre case the Tax Court disagreed, holding that those rules govern income tax. Whether that reasoning reaches estate tax has never been resolved.

There are two possible answers here and neither one helps you. Look through the LLC and your estate holds US real property, which is a US asset. Respect the LLC and your estate holds an interest in a company formed in America, which points the same way.

So an LLC is not estate tax protection, and the certainty it is usually sold with is the problem.

Where the LLC was formed makes no difference either. Wyoming, Delaware, Ohio, none of it changes the answer.

The look-through rule is real enough on the income tax side, where a US LLC does not make a foreign owner into a US person for form purposes. I have written about that in how to stop the 30% withholding on your US rent. It is the extension of that rule to death that nobody can actually point to.

An LLC is still worth having. It does real work on liability, on lender requirements, and on keeping your affairs tidy. It also brings an annual filing with a $25,000 penalty behind it, which I have set out in the form nobody mentions when they tell you to form an LLC. It just does not solve this.

4. What does a foreign corporation actually cost?

This one genuinely works, and it is worth understanding why, and what the trade-off is.

Shares in a foreign corporation are foreign-situs property, regardless of what the company owns. So if a Cayman or BVI company owns your US rental, what you own is shares in a foreign company. There is no US asset in your estate, and no US estate tax.

That is real, and it is the basis of most structuring advice you will read.

Here is what it costs. Take a $180,000 rental held ten years and sold at $274,000, which is roughly the long run US growth rate.

The company costs $39,955 of extra income tax to remove $65,960 of estate tax. A net benefit of about $26,005, and only if she dies owning the property.

Two things drive that. Corporations do not get the preferential long term capital gains rates, so the whole gain is taxed at 21%. Then the branch profits tax under section 884 adds 30% of the after-tax earnings when they leave the US.

So on one property it is roughly break-even, and it only pays off if you actually die owning the property. Sell while you are alive and you have spent about forty thousand dollars on insurance you never claimed on.

And it is worse every year, not just on sale

The table above is the exit. The annual position is worse, and it is the part that gets left out.

Take the same $180,000 property bought without a mortgage, which is the realistic case for a foreign company, since lenders will not finance one.

Owned personally, with the election in place, that produces roughly $400 of US tax at graduated rates. The depreciation line does most of that work, and it is worth claiming even when it seems to save nothing, as I set out in the depreciation advice that costs foreign investors thousands. Your home country then taxes the same profit and gives you credit for what you paid the IRS.

Owned by a foreign company, the same $4,004 goes through three layers.

That is four and a half times the US tax, before the dividend is taxed at home at all.

Three layers on the same income: US corporate tax, then branch profits tax on what survives it, then a dividend tax in your own country when the money finally arrives.

And the credit position is worse too. A dividend from a foreign company is not the same income as US rent for foreign tax credit purposes. The clean credit you get owning the property directly may simply not be there.

So the foreign company is not only expensive on the way out. It is expensive every single year you hold the property, and the estate tax it saves is a one-off event that may never happen.

On a large portfolio the arithmetic changes, because the estate exposure scales with the whole holding while some of the costs do not. That is section eight.

5. Can I get a mortgage inside a trust or a foreign company?

Here is the part that tax articles leave out and that decides the question for most investors.

The structures that fix estate tax are the ones lenders will not lend to.

Irrevocable trusts are refused outright. One lender's published guidance calls them completely prohibited, and a universal no-go.

The reason is neat and unhelpful. The legal separation that makes a trust work for estate tax is the same thing that stops a lender enforcing a personal guarantee. Others list irrevocable trusts and land trusts as ineligible borrowers. At least one rules out any form of trust.

Foreign corporations are barely better. Every foreign national DSCR program I have seen requires the borrower to be a US entity, normally an LLC, with a personal guarantee from the principals behind it. A US LLC owned by a BVI or Cayman company is, at best, assessed case by case. It is not a standard product and it is not quick. How these loans work, and what they ask of a foreign borrower, is in DSCR loans explained.

That matters more than it sounds, because the returns here come from borrowing. On a modeled ten year hold, a leveraged purchase roughly quadruples the return on the money you actually put in.

Give that up to save estate tax and you have solved a problem you may never have, while creating one you will have every year.

The one thing to remember: the structure that protects your estate is often the structure that stops you building one. Solve the financing first, then the estate tax, not the other way round.

6. What does it cost to restructure later?

The sensible-sounding answer is to buy in an LLC now, get the financing, and move it into a structure later when the portfolio justifies the cost.

It is a reasonable plan but it has a price, which grows every year.

Under IRC section 897(e)(1), the usual nonrecognition rules do not apply to dispositions of US real property by non-residents. And section 897(j) deals with this case specifically: gain is recognized when a non-resident transfers US real property to a foreign corporation as a contribution to capital.

The IRS meaning of disposal is broad. It covers exchanges, gifts, transfers and money put into a company. Moving a property also means a fresh set of transaction costs, broken down in what closing costs actually are.

So moving your house into a foreign company or a trust counts as a sale. You pay tax on all the growth since you bought, and FIRPTA withholding applies on top. Getting that money back is its own process, which I have set out in how to get your FIRPTA money back.

On the property above, restructuring in year ten would cost roughly $16,900 of tax with about $41,100 withheld, to move a house from one pocket to another. You still own it. You have simply paid to change its wrapper. How a bill like that is built, from basis through recapture, is worked through in capital gains tax when a foreign owner sells.

So there is a window rather than a plan. Do it when you buy, when there is no gain to tax but you cannot borrow. Do it later and pay for the growth. Or do neither, and handle the risk another way.

7. What actually reduces the bill for most owners?

Three things, and the first is the one nobody mentions.

Non-recourse debt

A non-recourse mortgage comes off the US value in full. Recourse debt is split against your worldwide estate, which helps far less.

Look at what that does. A $180,000 property with a $126,000 non-recourse mortgage against it is a $54,000 US estate. That is under the $60,000 exemption entirely.

So the borrowing that makes the returns work also shrinks the estate tax. The two facts are almost never set out together. If you hold two or three financed houses, your real exposure may be much smaller than the headline value.

One caution, and it is important. Whether a given loan counts as non-recourse for this rule is a legal question, and personal guarantees muddy it. Do not assume. Ask your attorney to read the actual loan documents on your actual houses. The mechanics of the loans themselves are in how to fund a US property purchase.

A treaty, if you have one

The US has estate and gift tax treaties with a small group of countries, including the UK, Canada, Germany and France. Newer treaties scale the exemption to your worldwide estate rather than leaving you on $60,000.

If your country has one, your position may be far better than the headline. For Canadians specifically I have set that out in do Canadians pay US estate tax. Ronald owns two Kansas City rentals from Ottawa, which puts him in that group, and his purchase is in his case study. What a British owner pays on the way out, on a real ten year hold, is in selling a US rental as a UK resident.

And if it does not, you are on the $60,000. I live in Brazil, which has no estate tax treaty with the United States. Whatever my own US property is worth above sixty thousand dollars is exposed, and no amount of reading changes that.

Life insurance

It does not avoid the tax. It pays it.

A payout on the life of a non-resident is generally outside the US estate. So a term policy sized to the likely bill means your family gets cash to pay it. The alternative is selling a house in a hurry, to a buyer who knows they have to.

It is the cheapest answer for most portfolios and the least discussed, because nobody makes a structuring fee out of recommending it.

8. When is a structure actually worth it?

I am not arguing against structures. I am arguing against buying one before you need it.

A foreign company starts to make sense when:

• The portfolio is large enough that the estate exposure dwarfs the extra income tax
• You are buying without leverage, so the financing objection falls away
• You intend to hold rather than sell, since the structure only pays off on death
• You are doing it at acquisition, so there is no gain to recognize

A trust becomes worth considering when you are planning succession rather than just avoiding a tax bill, and when the properties are owned outright so the lending restriction does not bite.

Both are decisions for a cross-border attorney, with the income tax cost, the estate tax saving and the effect on your borrowing modeled together on your own numbers. Not one of the three on its own, which is how most of this advice arrives. The wider question of how to hold US property at all is in how to structure your US property investment.

9. What has to be filed, and how long does my family get?

Form 706-NA is the US estate tax return for a non-resident. It is required once US-situs assets exceed $60,000, whether or not tax is due.

It is due nine months after death, with a six month extension available, which the IRS confirms in its estate tax questions and answers. The wider picture of what the US taxes and when is in my US tax guide for foreign investors. That is a short window for a family in another country, dealing with a US tax return, a US attorney, and a US house they have probably never seen.

Which is the practical argument for doing something now. Not because a structure is always right, but because your family should not be discovering any of this for the first time while the clock is running.

You can size your own exposure with the US estate tax calculator before deciding whether it is worth doing anything at all. The rest of the free tools, covering the deal and the cash you need, are in my investor starter kit. And if you would rather the structure was set up properly at the point of purchase, when it is cheapest to do, that is part of our purchase service.

The bottom line

The $60,000 exemption is indefensible and it is not going to change. A citizen gets two hundred and fifty times more, on the same asset, in the same country.

But the answer is not automatically a structure. A foreign company costs roughly forty thousand dollars of income tax on a modeled sale, to remove sixty six thousand of estate tax. And it only pays off if you die owning the house. A trust may stop you borrowing at all. Moving into either one later means paying tax on your own growth to change nothing but the wrapper.

For most people with two or three financed rentals, the honest answer is duller and much cheaper. Work out what your non-recourse debt already does to the number. Check whether your country has a treaty. Then buy a term policy sized to what is left.

Then revisit it when the portfolio is big enough that the arithmetic flips.

Remember, investing is a game of probabilities. Dying is not, and it is the one part of this you can plan for with certainty.