Foreign nationals who invest in U.S. assets frequently encounter two tax consequences that are both significant and, remarkably often, unanticipated. The first is a withholding obligation triggered when a foreign person disposes of U.S. real property interests. The second is an estate tax exposure that applies to U.S.-situs assets owned at death. Together, these two regimes can impose substantial costs on foreign investors who have not planned for them, and in many cases, the exposure is entirely avoidable with proper structuring.

The purpose of this article is not to provide a comprehensive tax planning guide. It is to ensure that foreign nationals and their advisors understand the scope of the problem before it materializes.

What Foreign Nationals Need to Know About U.S. Tax Exposure

FIRPTA Withholding

The Foreign Investment in Real Property Tax Act, commonly known as FIRPTA, requires that when a foreign person sells or otherwise disposes of a U.S. real property interest, the buyer must withhold a percentage of the gross sale price and remit it to the Internal Revenue Service. The standard withholding rate is 15% of the amount realized on the disposition. This withholding applies to the gross proceeds, not to the gain. If a foreign national sells a property for $2 million, $300,000 may be withheld at closing regardless of whether the seller has any taxable gain on the transaction.

The term "U.S. real property interest" is defined broadly. It includes direct ownership of U.S. real estate, interests in partnerships or LLCs that hold U.S. real estate, and stock in domestic corporations that qualify as U.S. real property holding corporations. A corporation is a U.S. real property holding corporation if the fair market value of its U.S. real property interests equals or exceeds 50% of the total fair market value of its real property interests worldwide plus its other business assets. This definition can capture entities that are not obviously "real estate companies" but that hold significant U.S. real property among their assets.

FIRPTA withholding is not a final tax. The foreign seller may file a U.S. tax return to report the actual gain on the disposition and claim a refund of any excess withholding. But the withholding itself is mandatory at closing, which means the seller must part with a substantial portion of the gross proceeds immediately and wait for the IRS to process a refund. In some cases, the seller can apply to the IRS in advance of closing for a withholding certificate that reduces or eliminates the withholding obligation, but this process takes time and requires disclosure of the transaction details to the IRS before the sale is completed.

U.S. Estate Tax

The second exposure is the U.S. estate tax on assets situated in the United States. When a non-resident alien dies owning U.S.-situs property, that property is included in the decedent's gross estate for U.S. estate tax purposes. The estate tax rate on amounts above the applicable exemption can reach 40%.

The critical disparity is in the exemption amount. U.S. citizens and residents currently benefit from a unified estate and gift tax exemption that exceeds $13 million per person. Non-resident aliens, by contrast, are entitled to an exemption of only $60,000. This means that a foreign national who dies owning $1 million in U.S.-situs assets faces a potential estate tax liability on $940,000 of that amount, at rates reaching 40%. For a U.S. citizen with the same assets, no estate tax would be due at all.

U.S.-situs assets for estate tax purposes include real property located in the United States, tangible personal property located in the United States, and stock in U.S. domestic corporations. Notably, stock in domestic corporations is U.S.-situs property regardless of where the share certificates are held or where the decedent resided. A foreign national who owns shares in publicly traded U.S. companies through a brokerage account abroad is still holding U.S.-situs property for estate tax purposes.

Certain assets are generally not considered U.S.-situs property for non-resident aliens, including bank deposits with U.S. banks (under certain conditions), debt obligations of U.S. persons, and insurance proceeds. But the exclusions are narrow and subject to specific requirements that must be carefully analyzed.

This Goes Beyond Real Estate

There is a common misconception that these tax exposures primarily affect foreign nationals who own U.S. real estate. While real estate is certainly the most visible category, the scope of both FIRPTA and the estate tax extends considerably further.

A foreign national who owns a significant investment portfolio of U.S. equities is holding U.S.-situs property for estate tax purposes. If that portfolio is worth $5 million at the time of death, the estate tax liability could exceed $1.9 million, a consequence that many foreign investors do not contemplate when building a portfolio of American stocks.

A foreign national who holds a membership interest in a U.S. LLC that operates a business or holds real estate may be subject to both FIRPTA (on a sale of the interest, if the LLC holds U.S. real property interests) and estate tax (on the value of the membership interest as U.S.-situs property). The LLC structure that was chosen for operational simplicity may inadvertently create significant tax exposure for the foreign owner.

Similarly, a foreign national who is a partner in a U.S. partnership or a shareholder in a U.S. corporation with substantial real estate holdings may trigger FIRPTA obligations upon a sale of interests and estate tax exposure upon death. The analysis is fact-specific and depends on the nature of the entity's assets, the classification of the interest, and the applicable treaty provisions, if any.

Neither Exposure Is Inevitable

The critical point for foreign nationals and their advisors is that neither FIRPTA withholding nor estate tax exposure is an unavoidable consequence of owning U.S. assets. Both can be substantially mitigated or eliminated through proper structuring, provided the planning is undertaken before the assets are acquired or, at minimum, before a triggering event occurs.

Common planning strategies include the use of offshore holding companies, which may avoid both FIRPTA withholding (by holding U.S. real property interests through a foreign corporation that does not qualify as a U.S. real property holding corporation or that makes a timely election) and estate tax (because the foreign national owns shares in a foreign corporation, which is not U.S.-situs property, rather than owning U.S. assets directly).

Trust structures can also be effective in removing U.S.-situs assets from the foreign national's gross estate, provided the trust is properly established in a jurisdiction with favorable tax treatment and the terms of the trust do not cause the assets to be included in the settlor's estate under U.S. tax principles.

Entity blocker structures, in which a foreign corporation interposes between the foreign investor and the U.S. asset, can convert what would otherwise be ECI or FIRPTA-taxable gains into dividends subject to withholding at a potentially lower effective rate. These structures involve trade-offs, including corporate-level tax and the cost of maintaining the entity, but they can produce a more favorable overall tax result than direct ownership.

The appropriate strategy depends on the nature of the assets, the investor's home jurisdiction, any applicable tax treaties, the investor's estate planning objectives, and the expected holding period. There is no single structure that works for every situation. What is universal is that the planning must occur in advance. Retroactive restructuring after a sale has occurred or after a death has triggered estate tax is, at best, expensive and, at worst, impossible.

A Note for the Advisors in the Room

Wealth managers, family office professionals, and financial advisors who serve foreign national clients bear a particular responsibility to identify these exposures early. The FIRPTA and estate tax regimes are not obscure provisions buried in the tax code. They are well-established, broadly applicable rules that affect a large and growing population of foreign investors in U.S. assets. Yet they continue to catch sophisticated investors off guard, often because the advisor who facilitated the investment did not flag the tax consequences at the point of acquisition.

The best practice is straightforward: before a foreign national client acquires a material U.S. asset, whether real estate, equities, a business interest, or a fund investment, the advisor should ensure that the client has consulted with legal and tax counsel who specialize in cross-border structuring. The cost of a planning engagement before the acquisition is a fraction of the tax that may be incurred without one.

These exposures are real, they are significant, and they are addressable. The only prerequisite is awareness, followed by timely action.