Alternatively, when the foreign investor does not wish to relinquish control (retained interest) over the assets, ownership of U.S. real property through a partnership (or other pass-through entity) may be appropriate.
As is the case with trusts (and individuals), the sale of U.S. real property by a partnership is treated as the sale of a capital asset and is eligible for the preferential rate when held for over a year.53
The estate tax implications, however, are somewhat uncertain.
Although corporate stock, debt obligations, proceeds of life insurance, and bank deposits are all clearly designated as U.S. situs property under I.R.C. §2104(a),54 the statute fails to address speciﬁcally other forms of intangible property such as goodwill, trust interests, patents, judgment debts, and, more relevantly, interests in a U.S. partnership.55
Therefore, a risk of inclusion in the foreign investor’s (in this case the "partner’s") gross estate exists.
Although not yet legislatively or judicially settled, the IRS may attempt to assert through a broad interpretation of case law and Treasury Regulations56 that a foreigner’s interest in a partnership is U.S. situs when the partnership owns U.S. real property.57
This position would cause the interest to be included in the foreigner’s gross estate.
Nonetheless, many practitioners in the ﬁeld believe that such a position would be an overbroad interpretation and would reach beyond the scope of Treasury Regulations and case law.
Accordingly, with the necessary disclosures, a foreign investor may choose the ownership structure of U.S. real property through a partnership as the most appropriate approach, relying on the position that, should this matter be contested, the weight of the law would support exclusion from the foreign partner’s U.S. gross estate.