Insights

How Non-US Investors Can Invest in the US and Reduce Their Tax Burden

You don’t have to be American to tap into the world’s largest economy. In fact, foreign investors have long turned to the U.S. for its strong property market, booming equity markets, and stable regulatory framework. But there’s one obstacle that can make or break those returns: taxation. Below are some strategies to help non-US investors reduce (and sometimes even avoid) hefty U.S. tax bills.

1. Using the Right Investment Vehicle

• LLCs & LPs: Many foreign investors use U.S. Limited Liability Companies (LLCs) or Limited Partnerships (LPs) to own assets. Why? These structures can limit personal liability and streamline the flow-through of income and deductions.
• Foreign Corporations: In some cases, it may be advantageous to set up an offshore entity that invests in a U.S. entity. This can help mitigate estate tax risks and simplify withholding.

2. Leveraging Tax Treaties

• Reduced Withholding: The U.S. has tax treaties with many countries that lower or eliminate withholding taxes on dividends, interest, and royalties.
• Paperwork is Key: To benefit, you typically need to file the right forms (e.g., W-8BEN-E) to prove you qualify. Skipping this step means the default (often higher) withholding rate applies.

3. Depreciation & Other Deductions

• Real Estate Depreciation: In the U.S., you can deduct a portion of your property’s value each year, lowering taxable rental income. This means more money stays in your pocket even if the property itself appreciates in the market.
• Cost Segregation: Splitting out components of the property (e.g., fixtures, appliances) lets you accelerate your deductions. It’s a smart move for those aiming to minimize taxes in the early years of ownership.

4. 1031 Exchanges: Deferring Capital Gains

• The “Secret Sauce”: Sell one U.S. property and buy another “like-kind” property without paying capital gains tax right away. Over time, you can snowball your equity into bigger and better investments, all while deferring taxes.
• Yes, Foreign Investors Can Do It: It takes a bit of structuring and paperwork, but non-residents are eligible for 1031 exchanges too.

5. Estate Planning Isn’t Optional

• The Estate Tax Trap: Non-resident aliens can be subject to U.S. estate tax on U.S.-based assets above a very low threshold (just $60,000).
• Shielding Assets: Using certain holding companies or trusts can help prevent your loved ones from facing a steep tax bill upon inheritance.

Bottom Line

Non-US investors can absolutely invest in the U.S. while significantly reducing their tax exposure—but it requires foresight, planning, and the right team of advisors. Whether it’s leveraging tax treaties, forming the right entity, taking advantage of depreciation, or rolling gains through 1031 exchanges, there’s a strategy (or combination of strategies) for practically every situation.

Disclaimer: This article is for informational purposes only and does not constitute tax or legal advice. Always consult with qualified professionals before implementing any investment structure.

Curious how these strategies might work for your portfolio? Contact The Laager Group today to learn more.