Navigating the federal tax implications for nonresident aliens (NRAs) who own United States real estate can be complex and challenging. Proper planning and expert guidance are essential to mitigate potential federal income, gift, and estate tax burdens. Without planning and guidance, an NRA’s U.S. real estate holdings may result in significant tax liabilities and complications for heirs, who could be subject to millions of dollars in taxes that might otherwise have been minimized or entirely avoided.
A hypothetical situation presented below highlights the importance of proactive planning by examining the federal gift, estate, and income tax consequences, as well as estate planning strategies for NRAs owning U.S. real estate.
A Cautionary Tale
In 2015, Mr. Frank, an NRA from China, invested in U.S. real estate by purchasing a $2 million luxury property in Los Angeles. The property was funded entirely with non-U.S. funds. To ensure his son, Sam, would benefit from the investment, Frank added him as a joint tenant with the right of survivorship. At the time, this seemed like a simple, thoughtful gesture. However, Frank was unaware of the U.S. tax implications created by his actions.
By adding Sam as a joint tenant, Frank effectively made a gift of 50% of the property’s value to his son. Under U.S. tax law, this triggered a gift tax liability. Unfortunately, Frank never filed Form 709 (U.S. Gift Tax Return) to report the gift, nor did he consult a U.S. tax attorney to understand the consequences.
In 2021, Frank passed away unexpectedly. At that time, the property was valued at $4 million. Sam, Frank’s joint tenant, was then living in the United Kingdom and inherited the U.S. property through the right of survivorship. In February 2025, Sam decided to make a fresh start by moving to Los Angeles and becoming a California resident. By that point, the property’s value had appreciated to $4.5 million. Sam sold the real estate for the same amount. He soon discovered the harsh financial consequences of some U.S. tax laws, as the failure to file Form 709 and the lack of estate planning resulted in significant tax liabilities.
The Gift Tax
When Frank added Sam as a joint tenant, the IRS treated this as a gift of 50% of the property’s value as of 2015, i.e., $1 million.
For 2015, the annual gift tax exclusion was $14,000 per recipient, allowing a donor to gift up to that amount without incurring gift tax or the need to file Form 709. After applying the $14,000 exclusion, the taxable gift amounted to $986,000 ($1,000,000 minus $14,000).[1]Under U.S. tax law, NRAs are subject to gift tax on transfers of U.S.-situs property beyond the available exclusion.[2] Unlike U.S. citizens and residents, NRAs are not entitled to the unified lifetime gift and estate tax exemption to offset gifts that exceed the annual exclusion.[3] Applying the progressive tax rates for gifts, the total gift tax liability before penalties and interest was approximately $345,340.[4]
Because Frank never filed Form 709 to report the gift, the IRS assessed his estate with additional penalties. Late filing penalties, which can reach up to 5% per month (capped at 25%) of the tax due, along with failure-to-pay penalties of 0.5% per month (also capped at 25%), added roughly $ 86,335 to the gift tax liability.[5] In addition, interest accrued at an average rate of 5% per year over 10 years, adding approximately $259,005.[6] In total, the gift tax impact—including penalties and interest—amounted to approximately $777,015. Unfortunately, the tax issues did not end there.
The Estate Tax
Under U.S. estate tax rules—I.R.C. sections 2103 and 2104—U.S.-situs assets are included in the taxable estate of an NRA. At the time of Frank’s death in 2021, the property was valued at $4 million. Under I.R.C. section 2040(a), when a decedent owns property jointly with a right of survivorship, the entire value of that property is included in the decedent’s gross estate unless the surviving joint tenant can prove that: 1) they originally contributed their share of the property with their own funds; and 2) they did not receive the property interest from the decedent as a gift or for less than full and adequate consideration.[7] In other words, unless Sam can prove he paid for his 50% joint tenancy interest, the full value of the property will be included in Frank’s estate.
Even more challenging is that, as an NRA, Frank’s estate was entitled to a very limited estate tax exemption for U.S.-situs property, $60,000,[8] making the taxable estate $3,940,000. Using the progressive estate tax brackets, the total estate tax liability before applying any credits was around $1,521,800.
Capital Gains Tax
After Frank’s death, the entire property received a full step-up in basis to $4 million because it was fully included in his estate.[9] As a result, when Sam sold the property in 2025 for $4.5 million, only the $500,000 of appreciation that occurred after Frank’s death was subject to capital gains tax.
In addition, the net investment income tax (NIIT) of 3.8% may apply if Sam’s modified adjusted gross income exceeds the applicable thresholds (over $200,000 for single filers or $250,000 for married couples filing jointly).[10]
Assuming Sam is a single filer with taxable income above $492,300, his taxable capital gain of $500,000 would result in a long-term capital gains tax of $68,691.25. In addition, the NIIT on his capital gain would be $11,400, bringing his total tax liability on the gain to $80,091.25.
The gift tax (including penalties and interest) amounted to $777,015, the net estate tax was $1,521,800, and the capital gains tax was $80,091.25. In total, the tax liabilities amounted to approximately $2,378,906.25.
The Lesson Learned
In the hypothetical provided, Frank’s and Sam’s experiences serve as a stark reminder of the critical role that tax and estate planning plays for NRAs investing in U.S. real estate. Without thoughtful planning, unforeseen gift and estate tax liabilities can erode the value of an investment, leaving heirs with a significantly diminished legacy. With the right strategy in place, however, these liabilities can be minimized or, in some cases with applicable strategies, avoided entirely.
Rules of Income Tax, Gift Tax, and Estate Taxes for NRAs
For a tax attorney, the first question is typically about the prospective client’s immigration status, as United States residents and NRAs are subject to very different tax rules. For example, the tax consequences for income tax, gift tax, and estate tax vary significantly depending on whether the individual is classified as a resident or nonresident for tax purposes.
The second critical question a tax attorney must ask is whether the assets in question are U.S.-situs assets, as this determination directly impacts the application of U.S. tax laws, particularly in the context of gift and estate taxes.
Income Taxes for NRAs
For U.S. income tax purposes, an individual is considered a resident if they hold a green card[12] or meet the substantial presence test, which generally requires at least 31 days of presence in the current year and 183 weighted days over the current and two prior years.[13] Individuals who do not meet either test are classified as nonresident aliens[14] and are taxed only on U.S.-source income and income effectively connected with a U.S. trade or business.[15]
When NRAs own U.S. real estate, rental income is taxed as U.S.-source income. By default, it is subject to a 30% withholding tax on gross income,[16] but NRAs may elect under I.R.C. section 871(d) to treat the income as effectively connected income (ECI), allowing taxation on a net basis at graduated rates, with deductions for property expenses and possible treaty benefits.[17]
Capital gains from the sale of U.S. real property are also taxed as ECI under the Foreign Investment in Real Property Tax Act (FIRPTA). The gain is taxed at the applicable long-term capital gains rate, up to 20%, and the buyer must withhold 15% of the gross sales price at closing and remit it to the IRS.[18] The NRA must file Form 1040-NR to report the gain and may claim deductions and request a refund if the FIRPTA withholding exceeds the actual tax owed. NRAs are not subject to the 3.8% Net Investment Income Tax.[19]
Gift Taxes for NRAs
The definition of an NRA for U.S. gift and estate tax purposes is different from the definition for income tax purposes. For gift tax purposes, residency is determined by the taxpayer’s domicile at the time of the gift. A person is considered domiciled in the U.S. if they live there, even briefly, with no definite present intent to leave.[20] NRAs not domiciled in the U.S. are subject to U.S. gift tax only on transfers of U.S.-situs tangible property, such as real estate or physical personal property located in the United States.
Under I.R.C. section 2501(a)(2), gifts of intangible property by NRAs are exempt from U.S. gift tax, regardless of the property’s situs, unless the donor is a “covered expatriate”[21] under I.R.C. section 2501(a)(3).[22] Treasury Regulations section 25.2511-3(b)(3)(i) confirms that stock of a U.S. corporation is classified as U.S.-situs intangible property.[23] However, for a non-covered expatriate NRA, such transfers are not subject to U.S. gift tax due to the broad exemption in section 2501(a)(2). Conversely, foreign corporate stock is treated as non-U.S.-situs intangible property and likewise escapes U.S. gift tax when transferred by an NRA.[24]
NRAs are also entitled to the annual gift tax exclusion—$19,000 per recipient in 2025—with gifts above that amount taxed at graduated rates ranging from 18% to 40%.[25] Overall, this framework provides significant planning opportunities for NRAs to transfer wealth—especially via foreign trusts or entities—without incurring U.S. gift tax liability.
Estate Taxes for NRAs
For estate tax purposes, an individual’s residency is also determined based on their domicile at the time of their passing.[26] A person is considered a U.S. resident for estate tax purposes if they are domiciled in the United States at the time of their death. “A person acquires a domicile in a place by living there, for even a brief period of time, with no definite present intention of later removing therefrom.”[27]
The estate of an NRA is subject to U.S. estate tax only on U.S.-situated property.[28] However, NRAs are entitled to a $60,000 estate tax exemption.[29] After the estate tax exemption, the estate tax rates range from 18% to 40%.[30]
How Can Frank Minimize the Tax Effects of a Transfer to Sam?
Using our hypothetical characters, how can Frank minimize estate taxes and avoid creating financial repercussions for Sam? There are several viable strategies to consider, each with its own tax implications.
Gifting Cash That Is Not U.S.-Situs
Assume Frank is aware that his U.S.-situs assets, properties physically located or deemed “situated” in the United States, are subject to U.S. gift and estate taxes. To minimize exposure to these taxes, Frank could devise a strategy to transfer only those assets not considered U.S.-situs. Instead of gifting Sam a 50% interest in the real property located in California, Frank would choose to gift cash held outside the United States.
Since Frank’s cash is held in a foreign bank account not physically or legally tied to the United States, it qualifies as a non-U.S.-situs asset and could be gifted to his son, Sam, without triggering U.S. gift tax.
Sam could then use the gifted foreign cash to purchase U.S. real estate, which is titled solely in his name or in a trust for his benefit. Because Frank never held title to the property, it did not become part of his estate and thus escaped U.S. estate tax when Frank passed away.[31]
However, this plan would also come with trade-offs. The property would not receive a step-up in basis at Frank’s death, meaning Sam could face higher capital gains taxes upon sale. Additionally, because the property is entirely in Sam’s name, Frank gave up all control and legal rights to it, which could be problematic if he wished to reside in it prior to his passing.
Holding U.S. Real Estate via a U.S. Corporation (USC)
Another strategy that may ease Sam’s financial burden is that Frank could form a U.S. corporation (USC) wholly owned by him and capitalize it with non-U.S. cash. USC could then acquire and hold title to U.S. real estate in Los Angeles. Frank would not appear on title under this strategy, as his interest would be in the USC shares. Over time, he may transfer USC stock to his son, Sam.
Gift Tax Treatment
For United States gift tax purposes, stock of a domestic corporation is treated as U.S.-situs property. However, an NRA is subject to U.S. gift tax only on transfers of U.S.-situs real property and tangible personal property; transfers of intangible property, including corporate stock, are excluded from the gift-tax base.[32] Accordingly, as long as Frank remains a nonresident non-citizen and is not treated as a “covered expatriate” under the separate regime of I.R.C. section 2801, his lifetime gifts of USC shares to Sam would not be subject to U.S. gift tax, even though the stock is U.S.-situs.
Estate Tax Exposure
The cost of using a USC appears at death. For an NRA, the U.S. gross estate includes property “situated in the United States.” Under I.R.C. section 2104(a), stock of a domestic corporation is deemed U.S.-situs property for estate tax purposes. Consequently, if Frank died still owning USC shares, the shares’ full fair market value would be included in his U.S. gross estate. NRAs are generally entitled to only a $60,000 estate tax exemption, after which graduated rates under section 2001(c) up to 40% apply. This can produce substantial estate tax exposure relative to the value of the underlying real estate.
Other Considerations
Because USC shares would be included in Frank’s gross estate, they would typically receive a step-up in basis at death under I.R.C. section 1014(a), which can reduce future capital gains tax for Sam if he later sells the shares or if USC liquidates. At the same time, this structure introduces income tax and administrative costs. USC is subject to federal corporate income tax at a flat 21% on its net rental income and gains from the sale of the property.
Although FIRPTA withholding under I.R.C. section 1445 generally applies to dispositions of U.S. real property interests by foreign persons rather than by domestic corporations, an eventual sale or restructuring involving foreign shareholders can still implicate FIRPTA at the shareholder level.[33]Distributions of after-tax corporate profits may be taxed again as dividends, creating potential double taxation. Maintaining the corporation also entails ongoing legal, tax, and compliance obligations.
U.S. Irrevocable Non-grantor Trust Holding a U.S. Corporation Owning U.S. Property
Frank establishes a U.S. irrevocable non-grantor trust and funds it with non-U.S.-situs assets, such as foreign cash or securities. The U.S. trust then uses the contributed capital to establish and fund a U.S. corporation. That corporation, in turn, purchases United States real estate, such as a rental property or personal-use home in California. It’s important to note, however, that in order for a nonresident grantor to create a U.S. trust, the trust must satisfy the necessary tests under I.R.C. Section 7701(a)(30)(E), which stipulates that a court within the United States must have primary supervision over the trust’s administration and a United States person must have authority to control substantial trust decisions.
How It Works
Frank, a nonresident alien, creates a U.S. irrevocable non-grantor trust and funds it solely with non-U.S.-situs assets, such as foreign cash or foreign securities. Because an NRA is subject to U.S. gift tax only on transfers of U.S.-situs real property and tangible personal property, this contribution of foreign assets is not subject to U.S. gift tax.[34] The funded trust then forms and capitalizes a U.S. corporation by subscribing for its shares. The corporation then uses the contributed capital to acquire U.S. real estate. At that point, Frank no longer owns either the real estate or the U.S. corporate stock; both are owned by the U.S. trust, which is a separate U.S. income tax taxpayer.[35]
Gift and Estate Tax Considerations
For gift tax purposes, Frank’s transfer of non-U.S.-situs assets—foreign cash or securities—into the irrevocable trust is not subject to U.S. gift tax because an NRA’s gift tax base is limited to U.S.-situs real property and tangible personal property. No U.S. property or U.S. corporate stock is transferred by Frank; those are acquired later by the trust and its U.S. corporation.
For estate tax purposes, if the trust is drafted so that Frank retains no powers or beneficial interests that fall within I.R.C. sections 2036 or 2038, then he does not own the U.S. real estate or the USC shares at death. In that case, neither the U.S. real estate nor the USC stock is included in his U.S. gross estate, even though they are U.S.-situs assets in the hands of the trust.[36] By interposing a properly structured irrevocable non-grantor trust and corporate holding company, Frank can avoid the U.S. estate tax exposure that would[37]otherwise apply if he directly owned the property or the shares.
Planning Implications
This strategy trades transfer tax minimization for income tax inefficiencies and loss of personal control. The U.S. corporation will be taxed at a flat 21% federal rate on its net rental income and any gain from the sale of the U.S. real estate. When the corporation pays dividends to the U.S. trust and, ultimately, to beneficiaries, those amounts may be taxed again at the trust or beneficiary level, creating classic double taxation on corporate earnings.
Because the trust and corporate structure is designed to keep the U.S. real estate and corporate shares outside Frank’s gross estate, his death does not trigger a basis step-up in the underlying property under I.R.C. section 1014. As a result, if the real estate appreciates substantially, beneficiaries may face higher capital gains on a later sale.
Finally, once Frank has transferred the foreign assets into the irrevocable non-grantor trust, he must truly relinquish control. If the trust is drafted so that he retains rights or powers that fall within I.R.C. sections 2036 or 2038—such as an ability to enjoy the property or to alter or revoke the trust—the U.S. authorities may treat the trust assets as part of his U.S. gross estate, undermining the intended transfer tax benefits.
Frank establishes an irrevocable foreign grantor trust (FGT) and makes a completed gift of non-U.S.-situs assets (such as foreign cash or securities) to the trust. The FGT acquires 100% of the shares of a foreign corporation (FRC), which in turn owns 100% of a U.S. corporation (USC). USC holds legal title to U.S. real estate. This multi-tier structure interposes both a foreign trust and a foreign “blocker” corporation between Frank and the U.S. real property. For U.S. income tax purposes, the FGT is structured as a grantor trust, so Frank is treated as the owner of the trust assets and income under I.R.C. sections 671–679, even though he has made a completed transfer for gift and estate tax purposes.
Gift Tax Outcome
Frank’s completed gift of foreign cash or securities to the FGT does not trigger U.S. gift tax because, as an NRA, he is subject to U.S. gift tax only on transfers of U.S.-situs real property and tangible personal property. Transfers of intangible property (including foreign securities) are excluded from the U.S. gift tax base.
If the FGT transfers FRC shares to a beneficiary during Frank’s lifetime, the transfer is treated as a gift of foreign corporate stock, which is an intangible asset situated outside the United States for gift tax purposes. Treasury Regulation section 25.2511-3(b)(3)(ii) classifies foreign corporate stock as non-U.S.-situs property, and an NRA’s gifts of such intangibles are not subject to U.S. gift tax under section 2501(a)(2), assuming Frank is not a “covered expatriate” subject to the separate section 2801 regime. Accordingly, lifetime gifts of FRC shares by or on behalf of Frank are generally not subject to U.S. gift tax, even though FRC ultimately owns a U.S. corporation that holds U.S. real estate.
Estate Tax Outcome
At Frank’s death, the FGT continues to hold the FRC shares. For a nonresident decedent, the U.S. gross estate includes only property “situated in the United States.”[38] Stock of a domestic corporation is treated as U.S.-situs property under I.R.C. section 2104(a), but stock of a foreign corporation is not; Treasury Regulation section 20.2105-1(f) treats foreign corporate stock as property situated outside the United States.
Under this strategy, Frank makes a completed, irrevocable transfer to the FGT and the trust is drafted so that he retains no powers or interests that would pull the trust assets back into his estate under I.R.C. sections 2036–2038. As a result, at his death he is not treated as owning the underlying U.S. real estate or the U.S. corporate shares; the relevant property interest is the FRC stock held by the FGT, which is foreign and non-U.S.-situs. Provided he does not directly own U.S.-situs assets and does not run afoul of special rules such as I.R.C. section 2104(b) (e.g., last-minute transfers of U.S. assets), neither the FRC shares nor the underlying U.S. real estate are included in his U.S. gross estate and no U.S. estate tax is imposed.
Income Tax Consequences and Practical Drawbacks
The trade-off is largely on the income tax and administrative side. USC, as a domestic corporation, is subject to U.S. corporate income tax at a flat 21% rate on its net rental income and gains from the sale of U.S. real estate. When USC sells its own real property, it is taxed as a regular U.S. corporation. If instead FRC disposes of a U.S. real property interest—either directly (by selling U.S. real estate) or indirectly (by selling stock of a U.S. real property holding corporation)—the transaction is governed by the Foreign Investment in Real Property Tax Act (FIRPTA). In that case, the gain is treated as effectively connected income under I.R.C. section 897(a), and a purchaser is generally required to withhold under I.R.C. section 1445 because the transferor is a foreign person.
Distributions of earnings from USC up to FRC and ultimately to the FGT or its beneficiaries can create multiple layers of taxation. Depending on the presence of U.S. beneficiaries and the composition of FRC’s income, U.S. beneficiaries may face Subpart F, PFIC, or foreign trust “throwback” issues, and both the foreign trust and foreign corporations will carry ongoing cross-border reporting and compliance obligations.
Moreover, because the U.S. real estate is held indirectly through corporate and trust layers that are not included in Frank’s U.S. estate, the underlying property does not receive a U.S. basis step-up at his death under I.R.C. section 1014. This can result in larger taxable gains when the real estate is eventually sold, even as the structure successfully avoids U.S. gift and estate tax on its value.
It’s also worth noting that although an FGT offers estate planning benefits, Frank could achieve the same tax result by owning FRC shares directly, as foreign corporate stock is non-U.S.-situs for both gift and estate tax purposes.
Nonresident aliens investing in U.S. real estate face complex and often harsh tax consequences, including exposure to U.S. gift and estate taxes and potential income tax inefficiencies. As illustrated by Frank’s case, failing to plan ahead can lead to millions in avoidable tax liability. However, with proper structuring—such as using foreign or domestic trusts, corporations, and strategic gifting of non–U.S.-situs assets—NRAs can significantly reduce or eliminate U.S. transfer taxes. To avoid costly surprises, the key is early, tailored planning with qualified tax professionals.
Cynthia Wu is the founder and managing partner of Concord & Wisdom, APC, where she focuses on CBP and international trade matters. She also advises on cross-border estate and tax planning for nonresident aliens and U.S. families with foreign assets, special needs trusts, probate/trust administration, and IRS compliance and controversy. Licensed in California, Florida, Texas, and Washington, D.C., Cynthia holds a J.D. from the University of Arizona and an LL.M. in Taxation from the University of Florida.
[4] Treas. Reg. §25.2511-1(h)(5) (Explicit joint tenancy example: if A buys property with A’s funds and title is taken as joint tenants with right of survivorship in A and B, A makes a gift to B to the extent of one-half the value of the property (unless B contributes)).
[11] These figures are rough estimates provided solely for illustrative purposes. They are not guaranteed to reflect actual tax liabilities, which may vary significantly depending on specific facts, timing, and applicable laws. Always consult a qualified tax professional for personalized advice.
[21] Covered expatriates are those to whom I.R.C. §877(b) applies. I.R.C. §2501(a)(3).
[22] I.R.C. §2501(a)(3) provides that the NRA intangible exemption in §2501(a)(2) does not apply to a “covered expatriate”; instead, such transfers are governed by the expatriate transfer tax regime under I.R.C. §2801 (gifts/bequests from a covered expatriate are hit at the recipient level).
[31] I.R.C. §2103 (defining the “gross estate” of an NRA decedent as including “only that part of his gross estate which at the time of his death is situated in the United States”).
Elementor #18115
Estate Planning Strategies for Nonresident Aliens
Navigating the federal tax implications for nonresident aliens (NRAs) who own United States real estate can be complex and challenging. Proper planning and expert guidance are essential to mitigate potential federal income, gift, and estate tax burdens. Without planning and guidance, an NRA’s U.S. real estate holdings may result in significant tax liabilities and complications for heirs, who could be subject to millions of dollars in taxes that might otherwise have been minimized or entirely avoided.
A hypothetical situation presented below highlights the importance of proactive planning by examining the federal gift, estate, and income tax consequences, as well as estate planning strategies for NRAs owning U.S. real estate.
A Cautionary Tale
In 2015, Mr. Frank, an NRA from China, invested in U.S. real estate by purchasing a $2 million luxury property in Los Angeles. The property was funded entirely with non-U.S. funds. To ensure his son, Sam, would benefit from the investment, Frank added him as a joint tenant with the right of survivorship. At the time, this seemed like a simple, thoughtful gesture. However, Frank was unaware of the U.S. tax implications created by his actions.
By adding Sam as a joint tenant, Frank effectively made a gift of 50% of the property’s value to his son. Under U.S. tax law, this triggered a gift tax liability. Unfortunately, Frank never filed Form 709 (U.S. Gift Tax Return) to report the gift, nor did he consult a U.S. tax attorney to understand the consequences.
In 2021, Frank passed away unexpectedly. At that time, the property was valued at $4 million. Sam, Frank’s joint tenant, was then living in the United Kingdom and inherited the U.S. property through the right of survivorship. In February 2025, Sam decided to make a fresh start by moving to Los Angeles and becoming a California resident. By that point, the property’s value had appreciated to $4.5 million. Sam sold the real estate for the same amount. He soon discovered the harsh financial consequences of some U.S. tax laws, as the failure to file Form 709 and the lack of estate planning resulted in significant tax liabilities.
The Gift Tax
When Frank added Sam as a joint tenant, the IRS treated this as a gift of 50% of the property’s value as of 2015, i.e., $1 million.
For 2015, the annual gift tax exclusion was $14,000 per recipient, allowing a donor to gift up to that amount without incurring gift tax or the need to file Form 709. After applying the $14,000 exclusion, the taxable gift amounted to $986,000 ($1,000,000 minus $14,000).[1] Under U.S. tax law, NRAs are subject to gift tax on transfers of U.S.-situs property beyond the available exclusion.[2] Unlike U.S. citizens and residents, NRAs are not entitled to the unified lifetime gift and estate tax exemption to offset gifts that exceed the annual exclusion.[3] Applying the progressive tax rates for gifts, the total gift tax liability before penalties and interest was approximately $345,340.[4]
Because Frank never filed Form 709 to report the gift, the IRS assessed his estate with additional penalties. Late filing penalties, which can reach up to 5% per month (capped at 25%) of the tax due, along with failure-to-pay penalties of 0.5% per month (also capped at 25%), added roughly $ 86,335 to the gift tax liability.[5] In addition, interest accrued at an average rate of 5% per year over 10 years, adding approximately $259,005.[6] In total, the gift tax impact—including penalties and interest—amounted to approximately $777,015. Unfortunately, the tax issues did not end there.
The Estate Tax
Under U.S. estate tax rules—I.R.C. sections 2103 and 2104—U.S.-situs assets are included in the taxable estate of an NRA. At the time of Frank’s death in 2021, the property was valued at $4 million. Under I.R.C. section 2040(a), when a decedent owns property jointly with a right of survivorship, the entire value of that property is included in the decedent’s gross estate unless the surviving joint tenant can prove that: 1) they originally contributed their share of the property with their own funds; and 2) they did not receive the property interest from the decedent as a gift or for less than full and adequate consideration.[7] In other words, unless Sam can prove he paid for his 50% joint tenancy interest, the full value of the property will be included in Frank’s estate.
Even more challenging is that, as an NRA, Frank’s estate was entitled to a very limited estate tax exemption for U.S.-situs property, $60,000,[8] making the taxable estate $3,940,000. Using the progressive estate tax brackets, the total estate tax liability before applying any credits was around $1,521,800.
Capital Gains Tax
After Frank’s death, the entire property received a full step-up in basis to $4 million because it was fully included in his estate.[9] As a result, when Sam sold the property in 2025 for $4.5 million, only the $500,000 of appreciation that occurred after Frank’s death was subject to capital gains tax.
In addition, the net investment income tax (NIIT) of 3.8% may apply if Sam’s modified adjusted gross income exceeds the applicable thresholds (over $200,000 for single filers or $250,000 for married couples filing jointly).[10]
Assuming Sam is a single filer with taxable income above $492,300, his taxable capital gain of $500,000 would result in a long-term capital gains tax of $68,691.25. In addition, the NIIT on his capital gain would be $11,400, bringing his total tax liability on the gain to $80,091.25.
Total Tax Liabilities[11]
The gift tax (including penalties and interest) amounted to $777,015, the net estate tax was $1,521,800, and the capital gains tax was $80,091.25. In total, the tax liabilities amounted to approximately $2,378,906.25.
The Lesson Learned
In the hypothetical provided, Frank’s and Sam’s experiences serve as a stark reminder of the critical role that tax and estate planning plays for NRAs investing in U.S. real estate. Without thoughtful planning, unforeseen gift and estate tax liabilities can erode the value of an investment, leaving heirs with a significantly diminished legacy. With the right strategy in place, however, these liabilities can be minimized or, in some cases with applicable strategies, avoided entirely.
Rules of Income Tax, Gift Tax, and Estate Taxes for NRAs
For a tax attorney, the first question is typically about the prospective client’s immigration status, as United States residents and NRAs are subject to very different tax rules. For example, the tax consequences for income tax, gift tax, and estate tax vary significantly depending on whether the individual is classified as a resident or nonresident for tax purposes.
The second critical question a tax attorney must ask is whether the assets in question are U.S.-situs assets, as this determination directly impacts the application of U.S. tax laws, particularly in the context of gift and estate taxes.
Income Taxes for NRAs
For U.S. income tax purposes, an individual is considered a resident if they hold a green card[12] or meet the substantial presence test, which generally requires at least 31 days of presence in the current year and 183 weighted days over the current and two prior years.[13] Individuals who do not meet either test are classified as nonresident aliens[14] and are taxed only on U.S.-source income and income effectively connected with a U.S. trade or business.[15]
When NRAs own U.S. real estate, rental income is taxed as U.S.-source income. By default, it is subject to a 30% withholding tax on gross income,[16] but NRAs may elect under I.R.C. section 871(d) to treat the income as effectively connected income (ECI), allowing taxation on a net basis at graduated rates, with deductions for property expenses and possible treaty benefits.[17]
Capital gains from the sale of U.S. real property are also taxed as ECI under the Foreign Investment in Real Property Tax Act (FIRPTA). The gain is taxed at the applicable long-term capital gains rate, up to 20%, and the buyer must withhold 15% of the gross sales price at closing and remit it to the IRS.[18] The NRA must file Form 1040-NR to report the gain and may claim deductions and request a refund if the FIRPTA withholding exceeds the actual tax owed. NRAs are not subject to the 3.8% Net Investment Income Tax.[19]
Gift Taxes for NRAs
The definition of an NRA for U.S. gift and estate tax purposes is different from the definition for income tax purposes. For gift tax purposes, residency is determined by the taxpayer’s domicile at the time of the gift. A person is considered domiciled in the U.S. if they live there, even briefly, with no definite present intent to leave.[20] NRAs not domiciled in the U.S. are subject to U.S. gift tax only on transfers of U.S.-situs tangible property, such as real estate or physical personal property located in the United States.
Under I.R.C. section 2501(a)(2), gifts of intangible property by NRAs are exempt from U.S. gift tax, regardless of the property’s situs, unless the donor is a “covered expatriate”[21] under I.R.C. section 2501(a)(3).[22] Treasury Regulations section 25.2511-3(b)(3)(i) confirms that stock of a U.S. corporation is classified as U.S.-situs intangible property.[23] However, for a non-covered expatriate NRA, such transfers are not subject to U.S. gift tax due to the broad exemption in section 2501(a)(2). Conversely, foreign corporate stock is treated as non-U.S.-situs intangible property and likewise escapes U.S. gift tax when transferred by an NRA.[24]
NRAs are also entitled to the annual gift tax exclusion—$19,000 per recipient in 2025—with gifts above that amount taxed at graduated rates ranging from 18% to 40%.[25] Overall, this framework provides significant planning opportunities for NRAs to transfer wealth—especially via foreign trusts or entities—without incurring U.S. gift tax liability.
Estate Taxes for NRAs
For estate tax purposes, an individual’s residency is also determined based on their domicile at the time of their passing.[26] A person is considered a U.S. resident for estate tax purposes if they are domiciled in the United States at the time of their death. “A person acquires a domicile in a place by living there, for even a brief period of time, with no definite present intention of later removing therefrom.”[27]
The estate of an NRA is subject to U.S. estate tax only on U.S.-situated property.[28] However, NRAs are entitled to a $60,000 estate tax exemption.[29] After the estate tax exemption, the estate tax rates range from 18% to 40%.[30]
How Can Frank Minimize the Tax Effects of a Transfer to Sam?
Using our hypothetical characters, how can Frank minimize estate taxes and avoid creating financial repercussions for Sam? There are several viable strategies to consider, each with its own tax implications.
Gifting Cash That Is Not U.S.-Situs
Assume Frank is aware that his U.S.-situs assets, properties physically located or deemed “situated” in the United States, are subject to U.S. gift and estate taxes. To minimize exposure to these taxes, Frank could devise a strategy to transfer only those assets not considered U.S.-situs. Instead of gifting Sam a 50% interest in the real property located in California, Frank would choose to gift cash held outside the United States.
Since Frank’s cash is held in a foreign bank account not physically or legally tied to the United States, it qualifies as a non-U.S.-situs asset and could be gifted to his son, Sam, without triggering U.S. gift tax.
Sam could then use the gifted foreign cash to purchase U.S. real estate, which is titled solely in his name or in a trust for his benefit. Because Frank never held title to the property, it did not become part of his estate and thus escaped U.S. estate tax when Frank passed away.[31]
However, this plan would also come with trade-offs. The property would not receive a step-up in basis at Frank’s death, meaning Sam could face higher capital gains taxes upon sale. Additionally, because the property is entirely in Sam’s name, Frank gave up all control and legal rights to it, which could be problematic if he wished to reside in it prior to his passing.
Holding U.S. Real Estate via a U.S. Corporation (USC)
Another strategy that may ease Sam’s financial burden is that Frank could form a U.S. corporation (USC) wholly owned by him and capitalize it with non-U.S. cash. USC could then acquire and hold title to U.S. real estate in Los Angeles. Frank would not appear on title under this strategy, as his interest would be in the USC shares. Over time, he may transfer USC stock to his son, Sam.
Gift Tax Treatment
For United States gift tax purposes, stock of a domestic corporation is treated as U.S.-situs property. However, an NRA is subject to U.S. gift tax only on transfers of U.S.-situs real property and tangible personal property; transfers of intangible property, including corporate stock, are excluded from the gift-tax base.[32] Accordingly, as long as Frank remains a nonresident non-citizen and is not treated as a “covered expatriate” under the separate regime of I.R.C. section 2801, his lifetime gifts of USC shares to Sam would not be subject to U.S. gift tax, even though the stock is U.S.-situs.
Estate Tax Exposure
The cost of using a USC appears at death. For an NRA, the U.S. gross estate includes property “situated in the United States.” Under I.R.C. section 2104(a), stock of a domestic corporation is deemed U.S.-situs property for estate tax purposes. Consequently, if Frank died still owning USC shares, the shares’ full fair market value would be included in his U.S. gross estate. NRAs are generally entitled to only a $60,000 estate tax exemption, after which graduated rates under section 2001(c) up to 40% apply. This can produce substantial estate tax exposure relative to the value of the underlying real estate.
Other Considerations
Because USC shares would be included in Frank’s gross estate, they would typically receive a step-up in basis at death under I.R.C. section 1014(a), which can reduce future capital gains tax for Sam if he later sells the shares or if USC liquidates. At the same time, this structure introduces income tax and administrative costs. USC is subject to federal corporate income tax at a flat 21% on its net rental income and gains from the sale of the property.
Although FIRPTA withholding under I.R.C. section 1445 generally applies to dispositions of U.S. real property interests by foreign persons rather than by domestic corporations, an eventual sale or restructuring involving foreign shareholders can still implicate FIRPTA at the shareholder level.[33] Distributions of after-tax corporate profits may be taxed again as dividends, creating potential double taxation. Maintaining the corporation also entails ongoing legal, tax, and compliance obligations.
U.S. Irrevocable Non-grantor Trust Holding a U.S. Corporation Owning U.S. Property
Frank establishes a U.S. irrevocable non-grantor trust and funds it with non-U.S.-situs assets, such as foreign cash or securities. The U.S. trust then uses the contributed capital to establish and fund a U.S. corporation. That corporation, in turn, purchases United States real estate, such as a rental property or personal-use home in California. It’s important to note, however, that in order for a nonresident grantor to create a U.S. trust, the trust must satisfy the necessary tests under I.R.C. Section 7701(a)(30)(E), which stipulates that a court within the United States must have primary supervision over the trust’s administration and a United States person must have authority to control substantial trust decisions.
How It Works
Frank, a nonresident alien, creates a U.S. irrevocable non-grantor trust and funds it solely with non-U.S.-situs assets, such as foreign cash or foreign securities. Because an NRA is subject to U.S. gift tax only on transfers of U.S.-situs real property and tangible personal property, this contribution of foreign assets is not subject to U.S. gift tax.[34] The funded trust then forms and capitalizes a U.S. corporation by subscribing for its shares. The corporation then uses the contributed capital to acquire U.S. real estate. At that point, Frank no longer owns either the real estate or the U.S. corporate stock; both are owned by the U.S. trust, which is a separate U.S. income tax taxpayer.[35]
Gift and Estate Tax Considerations
For gift tax purposes, Frank’s transfer of non-U.S.-situs assets—foreign cash or securities—into the irrevocable trust is not subject to U.S. gift tax because an NRA’s gift tax base is limited to U.S.-situs real property and tangible personal property. No U.S. property or U.S. corporate stock is transferred by Frank; those are acquired later by the trust and its U.S. corporation.
For estate tax purposes, if the trust is drafted so that Frank retains no powers or beneficial interests that fall within I.R.C. sections 2036 or 2038, then he does not own the U.S. real estate or the USC shares at death. In that case, neither the U.S. real estate nor the USC stock is included in his U.S. gross estate, even though they are U.S.-situs assets in the hands of the trust.[36] By interposing a properly structured irrevocable non-grantor trust and corporate holding company, Frank can avoid the U.S. estate tax exposure that would[37] otherwise apply if he directly owned the property or the shares.
Planning Implications
This strategy trades transfer tax minimization for income tax inefficiencies and loss of personal control. The U.S. corporation will be taxed at a flat 21% federal rate on its net rental income and any gain from the sale of the U.S. real estate. When the corporation pays dividends to the U.S. trust and, ultimately, to beneficiaries, those amounts may be taxed again at the trust or beneficiary level, creating classic double taxation on corporate earnings.
Because the trust and corporate structure is designed to keep the U.S. real estate and corporate shares outside Frank’s gross estate, his death does not trigger a basis step-up in the underlying property under I.R.C. section 1014. As a result, if the real estate appreciates substantially, beneficiaries may face higher capital gains on a later sale.
Finally, once Frank has transferred the foreign assets into the irrevocable non-grantor trust, he must truly relinquish control. If the trust is drafted so that he retains rights or powers that fall within I.R.C. sections 2036 or 2038—such as an ability to enjoy the property or to alter or revoke the trust—the U.S. authorities may treat the trust assets as part of his U.S. gross estate, undermining the intended transfer tax benefits.
Foreign Grantor Trust Holding a Foreign Corporation That Owns a U.S. Corporation Owning U.S. Real Estate
Frank establishes an irrevocable foreign grantor trust (FGT) and makes a completed gift of non-U.S.-situs assets (such as foreign cash or securities) to the trust. The FGT acquires 100% of the shares of a foreign corporation (FRC), which in turn owns 100% of a U.S. corporation (USC). USC holds legal title to U.S. real estate. This multi-tier structure interposes both a foreign trust and a foreign “blocker” corporation between Frank and the U.S. real property. For U.S. income tax purposes, the FGT is structured as a grantor trust, so Frank is treated as the owner of the trust assets and income under I.R.C. sections 671–679, even though he has made a completed transfer for gift and estate tax purposes.
Gift Tax Outcome
Frank’s completed gift of foreign cash or securities to the FGT does not trigger U.S. gift tax because, as an NRA, he is subject to U.S. gift tax only on transfers of U.S.-situs real property and tangible personal property. Transfers of intangible property (including foreign securities) are excluded from the U.S. gift tax base.
If the FGT transfers FRC shares to a beneficiary during Frank’s lifetime, the transfer is treated as a gift of foreign corporate stock, which is an intangible asset situated outside the United States for gift tax purposes. Treasury Regulation section 25.2511-3(b)(3)(ii) classifies foreign corporate stock as non-U.S.-situs property, and an NRA’s gifts of such intangibles are not subject to U.S. gift tax under section 2501(a)(2), assuming Frank is not a “covered expatriate” subject to the separate section 2801 regime. Accordingly, lifetime gifts of FRC shares by or on behalf of Frank are generally not subject to U.S. gift tax, even though FRC ultimately owns a U.S. corporation that holds U.S. real estate.
Estate Tax Outcome
At Frank’s death, the FGT continues to hold the FRC shares. For a nonresident decedent, the U.S. gross estate includes only property “situated in the United States.”[38] Stock of a domestic corporation is treated as U.S.-situs property under I.R.C. section 2104(a), but stock of a foreign corporation is not; Treasury Regulation section 20.2105-1(f) treats foreign corporate stock as property situated outside the United States.
Under this strategy, Frank makes a completed, irrevocable transfer to the FGT and the trust is drafted so that he retains no powers or interests that would pull the trust assets back into his estate under I.R.C. sections 2036–2038. As a result, at his death he is not treated as owning the underlying U.S. real estate or the U.S. corporate shares; the relevant property interest is the FRC stock held by the FGT, which is foreign and non-U.S.-situs. Provided he does not directly own U.S.-situs assets and does not run afoul of special rules such as I.R.C. section 2104(b) (e.g., last-minute transfers of U.S. assets), neither the FRC shares nor the underlying U.S. real estate are included in his U.S. gross estate and no U.S. estate tax is imposed.
Income Tax Consequences and Practical Drawbacks
The trade-off is largely on the income tax and administrative side. USC, as a domestic corporation, is subject to U.S. corporate income tax at a flat 21% rate on its net rental income and gains from the sale of U.S. real estate. When USC sells its own real property, it is taxed as a regular U.S. corporation. If instead FRC disposes of a U.S. real property interest—either directly (by selling U.S. real estate) or indirectly (by selling stock of a U.S. real property holding corporation)—the transaction is governed by the Foreign Investment in Real Property Tax Act (FIRPTA). In that case, the gain is treated as effectively connected income under I.R.C. section 897(a), and a purchaser is generally required to withhold under I.R.C. section 1445 because the transferor is a foreign person.
Distributions of earnings from USC up to FRC and ultimately to the FGT or its beneficiaries can create multiple layers of taxation. Depending on the presence of U.S. beneficiaries and the composition of FRC’s income, U.S. beneficiaries may face Subpart F, PFIC, or foreign trust “throwback” issues, and both the foreign trust and foreign corporations will carry ongoing cross-border reporting and compliance obligations.
Moreover, because the U.S. real estate is held indirectly through corporate and trust layers that are not included in Frank’s U.S. estate, the underlying property does not receive a U.S. basis step-up at his death under I.R.C. section 1014. This can result in larger taxable gains when the real estate is eventually sold, even as the structure successfully avoids U.S. gift and estate tax on its value.
It’s also worth noting that although an FGT offers estate planning benefits, Frank could achieve the same tax result by owning FRC shares directly, as foreign corporate stock is non-U.S.-situs for both gift and estate tax purposes.
Nonresident aliens investing in U.S. real estate face complex and often harsh tax consequences, including exposure to U.S. gift and estate taxes and potential income tax inefficiencies. As illustrated by Frank’s case, failing to plan ahead can lead to millions in avoidable tax liability. However, with proper structuring—such as using foreign or domestic trusts, corporations, and strategic gifting of non–U.S.-situs assets—NRAs can significantly reduce or eliminate U.S. transfer taxes. To avoid costly surprises, the key is early, tailored planning with qualified tax professionals.
Cynthia Wu is the founder and managing partner of Concord & Wisdom, APC, where she focuses on CBP and international trade matters. She also advises on cross-border estate and tax planning for nonresident aliens and U.S. families with foreign assets, special needs trusts, probate/trust administration, and IRS compliance and controversy. Licensed in California, Florida, Texas, and Washington, D.C., Cynthia holds a J.D. from the University of Arizona and an LL.M. in Taxation from the University of Florida.
[1] I.R.C. §2503(b).
[2] I.R.C. §2511(a).
[3] See I.R.C. §§2505(a), 2010(a) and (c).
[4] Treas. Reg. §25.2511-1(h)(5) (Explicit joint tenancy example: if A buys property with A’s funds and title is taken as joint tenants with right of survivorship in A and B, A makes a gift to B to the extent of one-half the value of the property (unless B contributes)).
[5] I.R.C. §6651(a).
[6] I.R.C. §6621.
[7] I.R.C. §2040(a).
[8] I.R.C. §2102(b).
[9] I.R.C. §1014.
[10] I.R.C. §1411.
[11] These figures are rough estimates provided solely for illustrative purposes. They are not guaranteed to reflect actual tax liabilities, which may vary significantly depending on specific facts, timing, and applicable laws. Always consult a qualified tax professional for personalized advice.
[12] I.R.C. §7701(b)(1)(A)(i).
[13] I.R.C. §7701(b)(3) (defining the substantial presence test formula).
[14] I.R.C. §7701(b)(1)(B) (defining “nonresident alien” as anyone who is neither a citizen nor meets §7701(b)(1)(A)).
[15] I.R.C. §§871, 882.
[16] I.R.C. §871(a).
[17] I.R.C. §871(b), (d).
[18] I.R.C. §§897,1445.
[19] I.R.C. §1411(e)(1).
[20] Treas. Reg. §25.2501-1(b).
[21] Covered expatriates are those to whom I.R.C. §877(b) applies. I.R.C. §2501(a)(3).
[22] I.R.C. §2501(a)(3) provides that the NRA intangible exemption in §2501(a)(2) does not apply to a “covered expatriate”; instead, such transfers are governed by the expatriate transfer tax regime under I.R.C. §2801 (gifts/bequests from a covered expatriate are hit at the recipient level).
[23] Treas. Reg. §25.2511-3(b)(3)(i).
[24] Treas. Reg. §25.2511-3(b)(3)(ii).
[25] I.R.C. §2502(a).
[26] Treas. Reg. §20.0-1(b)(1).
[27] Id.
[28] I.R.C. §2101(a). That regime is laid out in I.R.C. §§2101–2108, with the key situs rules in §§2103–2106.
[29] I.R.C. §2102(b).
[30] I.R.C. §2001(c).
[31] I.R.C. §2103 (defining the “gross estate” of an NRA decedent as including “only that part of his gross estate which at the time of his death is situated in the United States”).
[32] I.R.C. §2501(a)(2).
[33] I.R.C. §1445(e)(3).
[34] I.R.C. §2501(a)(2); Treas. Reg. §25.2501-1(a)(3).
[35] I.R.C. §§641–685.
[36] I.R.C. §§2036(a), 2038(a)(1), 2103, 2104(a).
[37] I.R.C. §11(b).
[38] I.R.C. §2103.