US Tax Guide for Foreign Property Investors: One Investor, One Property, Four Tax Bills

Let me tell you about four moments.

America taxes you when you buy a property. Again every year you own it. Again when you sell it. And again if you still own it when you die.

Three of those are manageable. Most foreign owners pay little or no US income tax for years, quite legally. I have paid none on my rental income for eight years. In that time I have held over a hundred properties at once. The full story of how that portfolio went is in how I nearly went bankrupt buying US rentals.

One of them is brutal, and it is the one almost nobody plans for.

There is also a simple tax form you need to submit to the IRS every year that will cost you $25,000 if you miss it. It applies even if you and/or your US entity (LLC etc) earns nothing. I'll cover that with all the details I have below.

So rather than just list the tax rules, I'll walk you through all four tax moments and show you the bill at each one based on an example property.

Meet the investor

Our investor lives outside the United States. No US passport, no green card, no Social Security number, and no US income other than this property.

In tax language she is a non-resident alien, or NRA. That just means she is not a US citizen and does not spend enough time in America to count as resident. Two simple tests decide that status: whether you hold a green card, and how many days a year you spend in the country.

She buys a $300,000 rental property. It rents for $36,000 a year. She buys it through a US limited liability company, an LLC, which is how most foreign buyers do it. I have written about why in how to structure your US property investment.

One thing to clear up now, because it stops people before they start. You do not need a personal US tax number to buy a property in the US. At least, not if you're buying through a US entity as advised. You will need one to file your first US tax return, which comes later. It is called an ITIN and your accountant applies for it. Plenty of people delay a purchase for months believing they need this in place first. You don't.

Buying: what you pay at closing

The first tax arrives on the day she buys, and it is small.

Most states and counties charge a transfer tax when property changes hands. Expect somewhere between 1% and 5%, and it varies a lot. Sometimes the seller pays it, sometimes you do, and sometimes you can negotiate.

Two real examples on her $300,000 purchase.

In Cuyahoga County, Ohio, which is Cleveland, the state charges $1 per $1,000 and the county $2 per $1,000. That comes to about $900. What it costs to actually own property there is set out in the best buy-to-let markets in the USA.

In Florida, the documentary stamp tax is $0.70 per $100. That comes to about $2,100 on our $300,000 home.

Ask for the settlement statement before you close. It shows the exact figure and who is paying it.

That is the entirety of the tax burden as relating to the purchase stage.

Owning: the election that changes everything

Now she owns it, and here is where most foreign owners either save a lot of money or lose it.

By default, America taxes your gross rent at 30%. Not your profit. Your rent. On $36,000 of rent that is $10,800 a year, with no deductions for the mortgage, the management fee or anything else. Your tenant's payment gets taxed before you have paid a single bill.

That default has a name, FDAP, which stands for fixed, determinable, annual or periodical income. You do not need to remember that. You just need to know it is the bad option.

But you can elect out of it. The election treats your rent as ECI, effectively connected income. In plain terms, it means America agrees to tax your profit instead of your rent, and to tax it at the same rates a US citizen pays.

That election is almost always the right move. Here is what it does.

Three steps to make it. Give your managing agent Form W-8ECI so they stop withholding the 30%. Attach a short statement to your first Form 1040-NR electing the treatment under section 871(d). Then report your profit on Schedule E, with depreciation on Form 4562.

Once made, it stays made. Treat it as permanent.

What you can then deduct. Management and letting fees. Repairs and maintenance. Property tax. Insurance. Mortgage interest and loan costs, which is usually the largest single deduction and depends on how you finance the purchase. My foreign national DSCR loan guide covers the options. Legal and accounting fees. Advertising and tenant checks. Eviction costs. LLC fees.

And depreciation, which is the big one. America lets you write off part of the building's value every year, spread over 27 and a half years, even though you have spent nothing. On a $300,000 house where the building is worth $240,000, that is $8,727 a year.

What her first year actually looks like

She has a small paper loss. So she owes $0 in US federal income tax.

Meanwhile the actual money in her account is different, because depreciation is not a cost she paid. Take out the depreciation and add back the loan principal she repaid, and she banked roughly $6,200 in real cash that year.

Zero tax on six thousand dollars of income. That is the election plus depreciation working together, and it is entirely legal.

Two warnings on it. Depreciation is recaptured when you sell, which I come to below. And some states tax rental income too, from nothing at all up to 13.3% in California. Most of the Midwest markets I buy in sit near the bottom of the range.

The one thing to remember: without the election you are taxed on rent. With it you are taxed on profit. On the same property that is the difference between $10,800 and nothing. Make the election.

Our US rental income tax calculator shows both figures on your own property, so you can see what the election is worth before you file.

Owning: and then your own country taxes it

I have to stop here and say something the rest of this guide does not cover, because otherwise you will walk away with the wrong number in your head.

Everything above is only the American half.

Most countries tax their residents on worldwide income. So the country you actually live in will usually want a share of this rent as well. And a $0 US tax bill does not mean a $0 tax bill.

Here is how it normally works. Your home country calculates what it thinks you owe, gives you credit for whatever you paid America, and collects the difference. That credit stops you being taxed twice on the same money. It does not stop you paying the higher of the two rates.

Which produces something people find hard to believe at first. If you pay America nothing, there is no credit to claim, so your home country collects the whole amount. The depreciation that wiped out your US bill has not saved you anything. It has just moved which government gets paid.

Whether that matters depends entirely on where you live, and the gap between countries is enormous.

I live in Brazil, so my $0 US bill really is $0. That is why I can say I have paid no US income tax for eight years and mean it.

A UK resident is in a completely different position. Rent from a US property is foreign property income in Britain, taxed at their normal rate, with no depreciation allowed and mortgage interest relief restricted. From April 2027 the UK taxes property income at 22%, 42% and 47%. I have gone through that in full, with the arithmetic, in UK tax on US rental income.

A Canadian is different again, and better served by the treaty. That is covered in my US tax guide for Canadian investors.

If you live somewhere else, the principle still holds and the numbers will not. Ask your accountant at home what they will charge you on this before you decide whether the deal works.

Owning: the form nobody warns you about

This section is new, and it is the reason I rewrote this guide in August 2026.

If you own US property through an LLC or other form of US legal entity, and almost everyone reading this does, you probably have to file Form 5472 every year. If you do not, the penalty is $25,000.

Here is why it catches people.

A single-member LLC owned by a foreigner is what the IRS calls a disregarded entity. That means it is ignored for income tax purposes and you are taxed directly. People hear "disregarded" and reasonably assume there is nothing to file for the company.

That is wrong, and the trap is beautifully simple. Form 5472 reports transactions between the LLC and its foreign owner. Putting money into the LLC is a transaction. So the moment you wire funds in to buy the property, you have created a reporting obligation, whether or not the company ever earns a penny.

Now the penalty, straight from the IRS instructions to Form 5472.

An example of how that escalates. Someone misses the 2023 filing. The IRS writes to them in March 2026. They sort it out by September.

On a company that may have made nothing at all.

Three practical points. It attaches to something called a pro forma Form 1120, which your accountant handles. It cannot be filed online, only posted or faxed. And it is due 15 April, with an extension to 15 October if you ask on Form 7004.

I am not raising this to frighten you. I am raising it because it is the single most expensive mistake available to a foreign owner of a US rental, it is entirely avoidable, and the previous version of this article mentioned it in passing. Ask your accountant about it by name.

Selling: the 15% that is not a tax

Years later she sells for $500,000. Two separate things now happen and people confuse them constantly.

The first is FIRPTA. The Foreign Investment in Real Property Tax Act makes the buyer or the closing agent hold back 15% of the gross sale price and send it to the IRS. On a $500,000 sale that is $75,000.

This is not your tax bill. It is a deposit. America is making sure a foreign seller does not leave the country with the money before filing. You reconcile it against your actual tax later and get the difference back.

If she sells through the LLC, the LLC does the withholding. Because the LLC is disregarded, the IRS treats it as a sale by her directly. There is a worked example of how this reconciles on a real sale in selling a US rental as a foreign owner.

Four ways it can come down. If the price is $300,000 or less and the buyer will live there, it can drop to zero. You can apply before closing using Form 8288-B if your real gain is small. A treaty may reduce it. And if you receive no proceeds, there is nothing to hold back.

Any over-withholding comes back when you file for the year of the sale. That is normally a refund, not a fight.

Our FIRPTA withholding calculator does this arithmetic on your own sale, including the reduced rates, the effect of your holding structure, and the refund.

Selling: what you actually owe

Now the real bill.

Two things get taxed when you sell. The profit, and the depreciation you claimed along the way.

Start with your basis, which is what the property counts as having cost you. This is where the old version of this guide made a mistake, so let me be careful.

Your basis is what you paid, including the land, minus the depreciation you claimed, plus any improvements. The land matters. You do not depreciate it, but you did pay for it, so it counts.

Then the gain.

That gain gets split in two and taxed differently.

The depreciation comes back first. All $87,270 of it is taxed at up to 25%. That is $21,818. This is what people mean by recapture, and it is why depreciation is a deferral rather than a gift.

The rest is a long-term capital gain, because she held it more than a year. That is $160,000. On the 2026 bands, the first $49,450 is taxed at 0% and the rest at 15%. That is $16,582.

So she pays $38,400 on a headline profit of $200,000, after paying no income tax for a decade. And since $75,000 was withheld under FIRPTA, she is owed a refund of $36,600.

I want to flag the correction. An earlier version of this article calculated the basis from the building value alone and left the land out. That produced a tax figure of $47,566, which overstated it by more than $9,000. If you read that version and planned around it, I am sorry. This is the right arithmetic.

The one place you beat a US citizen

Here is something no guide for foreign investors seems to mention, and it is worth real money.

US citizens and residents pay an extra 3.8% on investment income above certain thresholds. It is called the Net Investment Income Tax, and it applies to rent and to capital gains.

Non-resident aliens do not pay it. That is section 1411(e)(1) of the tax code, and the IRS says so plainly in its own instructions to Form 8960: the tax does not apply to non-resident alien individuals.

On our sale, that is not a small point.

On the biggest transaction of the whole cycle, the foreigner pays less than the American. Everything else in this guide is about ways the US system treats you worse. This is the one that runs the other way, and nobody tells you about it.

Dying: the real trap

Now the moment almost nobody plans for, and the reason I keep telling clients to get proper advice early.

If you still own the property when you die, America wants a share.

A US citizen can pass on $15 million in 2026 before any federal estate tax is due. That figure rises with inflation.

A non-resident gets $60,000.

That is not a typo. It is 250 times less. Above it, the rate climbs to 40%.

And it gets worse when you look at where the number comes from. The $60,000 was set in 1976 and has never been raised. Our US estate tax calculator shows what that means for a property of your value. The IRS confirms it is not adjusted for inflation. Adjust it for US prices since 1976 and it would be worth several hundred thousand dollars today. Instead it has stayed where it was for fifty years while the citizen figure went up and up.

So on our $500,000 property, held at death with no planning, the exposure runs into six figures.

Your executor files Form 706-NA within nine months of death, with a six-month extension available.

What a treaty can do

This is where it can change completely, and it depends entirely on your passport.

The US has death tax treaties with fifteen countries. They include the United Kingdom, Germany, France, Japan and Australia, and Canada is covered through a provision in the income tax treaty rather than a separate one. Others include Finland and Switzerland.

What a treaty typically does is give you a share of the citizen exemption rather than the flat $60,000. The share is roughly the proportion your US assets bear to your worldwide estate.

So if your US property is 20% of everything you own, you might claim around 20% of the citizen exemption. On a $15 million exemption that is $3 million rather than $60,000. Canadians get some of the best treatment here, which I cover in US estate tax for Canadians.

Which is why nationality matters here more than anywhere else in this guide. A German and a Brazilian buying identical houses face completely different exposure on death, and neither will find that out from a property listing.

Structures can also help. A foreign company, a trust, or a two-tier arrangement. But each one has consequences for your income tax and your capital gains, and getting it wrong is expensive. This is not a do-it-yourself area.

Gift tax works the same way, in case you thought of simply giving the property away. The person giving pays, US property is covered, and the annual allowance is $19,000. Gifts to a spouse who is not a US citizen get $194,000. Anything above is reported on Form 709.

What you file, and when

Each year, typically:

Form 1040-NR, your non-resident tax return, with Schedule E for the rental income and Form 4562 for depreciation.

Form 5472 if you own through an LLC, attached to a pro forma Form 1120. See above. This is the one that bites.

Form 1042 where withholding applies. Form 1120-F if you use a foreign company.

The deadline is generally 15 April.

And one thing to watch that has nothing to do with forms. How many days you spend in America matters. Spend too many and you can accidentally become a US tax resident, which changes everything, including exposing your worldwide income. It is called the Substantial Presence Test. Count your days. The wider process of buying is set out in how to buy US property as a foreign national.

What I would do

Four things, and I have learned each of them the expensive way.

Make the ECI election immediately. It is the difference between being taxed on rent and being taxed on profit. On our example that is $10,800 a year against nothing.

Ask your accountant about Form 5472 by name. Do not assume they have it covered because your LLC is disregarded. That is exactly the assumption that produces the penalty.

Find out what your own country will charge you, on the income and on death, before you buy. Not after. A US pension wrapper will not help and nor will a British one, which I covered in can you hold US property in a SIPP.

Find out what your country's treaty says about death before you buy. Not after. If you are from a treaty country your exposure may be manageable. If you are not, you need a structure, and structures are much easier to set up at the start than to unpick later.

And hire someone who does this specifically. Not a general accountant in your own country. Not a US accountant who mostly does domestic returns. A CPA or Enrolled Agent who handles international real estate. They will cost more than you want to pay and less than one mistake.

If you want to work through the numbers on a specific property first, the free tools in my investor starter kit will size the deal and the cash you need. They will not do your tax return.

The bottom line

Buying is cheap. Owning, done properly, often costs nothing in US income tax for years. Selling costs you real money but less than the headline suggests, and less than a US citizen would pay on the same sale.

Dying is the one that will hurt, and it is the one nobody asks me about until the paperwork is already done.

So get the election right, ask about the form with the $25,000 penalty, and find out what happens to your family before you need to know.

Remember, investing is a game of probabilities. Tax is not one of them. It is rules and math, and almost all of it can be sorted out before you buy.