Gain from the sale of U.S. real property interests

 

The income tax rate applicable to the gain from the sale of US. real property by a foreign investor depends on the form of holding and the type of ownership.
Once determined, the gain (or loss) will result in either the ordinary income tax rate (currently up to 35%) or capital gains tax rate.26

The first step is to determine the form of ownership.
In the case of direct ownership by a foreign individual,27 trust, or pass-through entity, gains from the sale of U.S. real property are treated as capital gains (subject to the type of ownership discussed below).28
As long as the interest had been held for at least a year, the applicable rate will be the preferential long-term capital gains rate (currently at 15%)29, however corporations are ineligible for this tax rate, therefore the 35% rate applies.30

Once the form of ownership is determined to be eligible for capital gains treatment on the sale of the interest, the second step is to determine the type of ownership.
This depends on whether the U.S. real property interest is “effectively connected with a U.S trade or business” or FDAP.
When the US real property interest is effectively connected to the foreign investor’s U.S. trade or business, or when the interest is held as inventory, gains from the sale thereof will be subject to the ordinary income tax rates.31
If the income is deemed to be FDAP (and was held for at least a year), the gain will be subject to the preferential long-term capital gains rate.32

Accordingly, from a pure income tax perspective, ownership through a corporation (rather than a pass-through entity) is the less tax-efficient approach.