Between April 2024 and April 2025, foreign buyers purchased about $56 billion of U.S. real estate (roughly 78,100 homes), up 33% year on year. The U.S. market keeps drawing overseas investors, but as a non-resident alien (NRA) you carry U.S. tax obligations at every stage: buying, owning, and eventually selling, plus estate tax if you still own on death. Drawing on my own experience buying 120+ U.S. properties as a foreigner, here is how it all fits together.
Important: this is general education, not tax advice. U.S. tax law for non-residents is complex and fact-specific. Always work with a CPA or Enrolled Agent who specializes in international real estate before you act.
The four stages where U.S. tax applies| Stage | Main taxes | Key point |
|---|
| Buying | Transfer taxes (1% to 5%) | Paid at closing; who pays is often negotiable |
| Owning | Property tax + income tax on rent | Elect ECI to be taxed on net, not 30% of gross |
| Selling | FIRPTA 15% + capital gains + recapture | FIRPTA is a prepayment, reconciled on your return |
| On death | Estate tax up to 40% | Only a $60,000 exemption, unless a treaty helps |
Key tax concepts
A non-resident alien is anyone who is not a U.S. citizen and does not meet the Green Card Test or the Substantial Presence Test. As an NRA you file a U.S. return each year to report U.S.-sourced income, including rent and any gain on sale. Two identifiers matter: an ITIN (Individual Taxpayer Identification Number), the foreigner's equivalent of a Social Security Number, which you only need when you file your first return, not to buy; and an EIN (Employer Identification Number) for your LLC if you use one.
The single most important idea is the difference between FDAP and ECI. By default, U.S. rental income is FDAP (Fixed, Determinable, Annual, or Periodical), taxed at a flat 30% of gross with no deductions, withheld at source by your payer. But you can elect to treat it as ECI (Effectively Connected Income): no 30% withholding, full deductions and depreciation, and net income taxed at the same graduated rates as citizens. Making the ECI election is almost always the right move. Your ownership structure and your country's tax treaty also shape the outcome; see how to structure your investment.
Buying: transfer taxes
Beyond the price, expect transfer taxes at closing, usually 1% to 5%, varying by state and county, and sometimes negotiable between buyer and seller. Two examples on a $300,000 purchase: in Cuyahoga County (Cleveland), Ohio's $1 per $1,000 plus the county's $2 per $1,000 comes to about $900; in Florida, the documentary stamp tax of $0.70 per $100 comes to about $2,100. Always review the settlement statement before closing to see the amount and who pays.
Owning: property tax and income tax
Property taxes are annual, set by local government on assessed value times a millage rate, and they vary enormously. On a $300,000 home, Cleveland's Brooklyn neighborhood (Cuyahoga County) at about 2.31% is roughly $6,930 a year, while Clearwater (Pinellas County), Florida at about 1.05% is roughly $3,150. A high tax bill can eat your cash flow, so confirm the exact figure before you buy, and remember a sale often triggers a reassessment.
For income tax, if you make the ECI election you are taxed on net rental income at graduated rates. Three steps make the election: give Form W-8ECI to your withholding agent so they stop withholding 30%; attach a statement to your first Form 1040-NR electing ECI treatment under IRC Section 871(d); and report net income on Schedule E, with depreciation on Form 4562. The election is essentially permanent once made.
2025 graduated income tax rates (apply after the ECI election)| Rate | Taxable income |
|---|
| 10% | $0 to $11,925 |
| 12% | $11,926 to $48,475 |
| 22% | $48,476 to $103,350 |
| 24% | $103,351 to $197,300 |
| 32% | $197,301 to $250,525 |
| 35% | $250,526 to $626,350 |
| 37% | Over $626,350 |
Deductible expenses are broad: property management and leasing, repairs and maintenance, property taxes and LLC fees, mortgage interest and loan costs, insurance, professional and legal fees, advertising and tenant screening, eviction costs, and depreciation of the building and improvements under MACRS. Depreciation is powerful, but note that it is later recaptured at up to 25% when you sell.
Worked example: income tax with the ECI election
A $300,000 property with $36,000 gross annual rent. Deductions: management $3,600, repairs $3,600, property tax $3,900, insurance $1,000, depreciation $8,727, mortgage interest $15,750, totaling $36,577. Net taxable income is $36,000 minus $36,577, a small paper loss of about $577, so you owe $0 in federal income tax, even though the property actually netted around $5,937 in real cash flow that year. That is the power of the ECI election plus depreciation.
Some states also tax rental income, from 0% to as high as 13.3% in California. Many of the Midwest markets I favor sit at the low end.
Selling: FIRPTA and capital gains
FIRPTA (the Foreign Investment in Real Property Tax Act) makes the buyer or closing agent withhold 15% of the gross sale price from a foreign seller and send it to the IRS. It is a prepayment, not the final tax. On a $500,000 sale that is $75,000 withheld. If your LLC sells, your LLC is the withholding agent.
Common ways to reduce FIRPTA: if the price is $300,000 or less and the buyer will use it as a residence, withholding can drop to 0%; you can apply before closing for a withholding certificate (Form 8288-B) if your actual gain is small; a treaty may reduce it; and if you receive no proceeds there is nothing to withhold. Any over-withholding is refunded when you file your return for the year of sale.
Separately, you owe capital gains tax on the profit. Held one year or less, it is short-term at ordinary rates; held longer, it is long-term at the more favorable rates below. Gains are measured against your adjusted cost basis, not the original price, so keep meticulous records.
2025 long-term capital gains rates (held over one year)| Rate | Taxable income |
|---|
| 0% | $0 to $48,350 |
| 15% | $48,351 to $533,400 |
| 20% | Over $533,400 |
Worked example: long-term capital gains after 10 years
Sell for $500,000 a property bought for $300,000 (building basis $240,000). Claimed depreciation of $87,270 and $10,000 of improvements give an adjusted basis of $162,730; after $30,000 selling costs, net proceeds are $470,000, for a total gain of $307,270. The $87,270 of depreciation is recaptured at 25% ($21,817.50). The remaining $220,000 is taxed long-term: the first $48,350 at 0%, the next $171,650 at 15% ($25,748). Total capital gains tax is about $47,566, an effective rate of roughly 23.8% on the $200,000 headline gain, after paying no income tax for a decade. If $75,000 of FIRPTA was withheld, you would be due a refund of about $27,434.
Estate and gift tax
This is the trap most non-residents miss. U.S. citizens have a huge estate tax exemption ($13.9 million in 2025, rising to $15 million in 2026). Non-residents get just $60,000, and U.S. real estate above that can be taxed up to 40% on death. Many treaties help: the UK and Canada treaties, for example, give a pro-rated unified credit, so if U.S. assets are 20% of your worldwide estate you can claim roughly 20% of the citizen exemption.
For a Canadian-specific guide covering the CRA side, foreign tax credits, and the LP filing structure, see my US tax guide for Canadian investors.
Federal estate tax rates for non-residents (first $60,000 is exempt)| Taxable estate above exemption | Marginal rate |
|---|
| Up to $20,000 | 18% to 20% |
| $60,000 to $100,000 | 26% to 28% |
| $100,000 to $250,000 | 30% to 32% |
| $250,000 to $500,000 | 34% |
| $500,000 to $1,000,000 | 37% to 39% |
| Over $1,000,000 | 40% |
Above $60,000 your executor files Form 706-NA. You can mitigate estate tax with a foreign corporation, an irrevocable trust, or a two-tier structure, but each can raise income or capital gains tax, so this is expert territory. Gift tax mirrors estate tax: the donor pays, U.S. real estate is covered, the annual exclusion is $19,000, and gifts above it are reported on Form 709.
Filing: forms and deadlines
Each year you will typically file Form 1040-NR with Schedule E (rental income and deductions), Form 4562 (depreciation), Schedule NEC and Schedule OI, and often Form 5472 (LLC transactions with foreign owners) and Form 1042 (withholding). A foreign corporation adds Form 1120-F. The deadline is generally April 15. Given the stakes, hire a CPA or Enrolled Agent, keep meticulous records, and watch the Substantial Presence Test so time spent in the U.S. does not accidentally make you a tax resident.
Get the structure and elections right from the start and U.S. property is highly tax-efficient. If you want help doing that, you can book a call, or read how to structure your investment and the full buying guide.
