Planning to Minimize U.S. Taxation on Foreign Real Estate Investments Held by Foreigners
As discussed above, aliens are subject to U.S. income taxation on a limited basis. Unlike U.S. persons who are subject to U.S. taxation on their worldwide income, foreign investors generally are subject to U.S. taxation on two categories of income: 1) certain types of U.S. source income (e.g., interest, dividends, rents, annuities, and other types of “fixed or determinable annual or periodical income,” collectively known as FDAP income); and 2) income that is effectively connected with a U.S. trade or business (“ECI”). U.S. source FDAP is subject to a 30 percent withholding tax imposed on a gross basis (this rate may be reduced by treaties) and ECI is subject to tax on a net basis at the graduated tax rates generally applicable to U.S. taxpayers.