Buying Foreign Real Estate? How to Choose the Right Structure Before You Sign
Contents
- Your Holding Options
- Direct Holding In Your Name
- Joint Ownership
- Through a US Trust
- Through a US LLC
- Through a Local “C-Corp” Equivalent (i.e. from a US perspective, a Foreign Corporation)
- Through a Local “LLC Equivalent” (i.e. from a US perspective, an entity that can potentially be classified as a passthrough.)
- Through Some Other Entity
- Through an IRA
- Which Structure is Best?
- Your Objectives
- Jurisdictional Rules
- The Investment Size
I had a call with a client a few days ago to discuss their foreign real estate. They’ve entered into purchase agreements to buy a number of properties in a couple of countries and wanted to know the best way to hold them.
I had to clarify that there’s really no such thing – what’s best for one person in one case may be the worst for another in the same case. It’s really a question of what’s best for you.
But there are some common building blocks – holding options – that work better for some countries than others depending on the goal.
In today’s article, I’m going to share what those options are and, just as importantly, clarify the right way to go about looking at this.
After reading this article, if you need help with your existing plan, or you’re looking to purchase foreign real estate and want to make sure you do it right the first time, feel free to get in touch.
Your Holding Options
Not all foreign countries allow Americans to buy property there. Some restrict it to certain types of real estate. Others allow it only if you use certain structures.
But for the most part, most countries offer a variety of ways to hold property – each with their own pros and cons. Let’s have a look…
Direct Holding In Your Name
Pros:
- Easy to set up and easy to understand.
- No need to form or maintain a separate entity.
- Usually straight forward US tax reporting.
- No separate US entity filings.
Cons:
- Subject to local probate at death, which can be slow and costly, not to mention public.
- Forced heirship rules in some countries may control who inherits.
- No liability protection beyond insurance.
- Your name is typically public on the local land registry.
- No built-in management structure if you become incapacitated.
Joint Ownership
This can take several forms:
Joint tenancy with right of survivorship.
Tenancy in common.
Community property.
Each carries different legal and tax consequences, and not all are available or recognized in every country.
Pros:
Generally easy to set up, especially for spouses.
In some countries, ownership passes automatically to the survivor.
Clear ownership percentages if set up as tenants in common.
No need to form or maintain an entity.
Cons:
May still require local probate, depending on the country.
Forced heirship rules can complicate joint holdings.
A co-owner’s creditors can claim that person’s share, potentially causing complications in managing the property.
Ownership can become fragmented over time as shares pass to heirs.
General Comments: Joint ownership is simple, but it can be a fiddly option if the country you choose doesn’t offer solid support for this kind of holding, particularly when it comes to estate planning.
Through a US Trust
Pros:
Can fit directly with your US estate plan.
Avoids probate in many cases if properly structured and funded.
Usually set up to have another person ready to step in if you’re incapacitated or pass away.
Potential asset protection benefits, depending on structure and governing law.
Cons:
May not be recognized as a separate legal owner in some foreign jurisdictions without additional structuring… or at all.
Can complicate local administration, especially if you buy in a civil law country that doesn’t recognize trusts (which is an entity that belongs to common law, the US standard).
Most of the time, no tax savings; income still generally flows through to you.
General Comments: A revocable US trust is often used simply to bring foreign property into a broader US estate plan. But because trusts aren’t well supported in most civil law countries, it can cause complications.
Through a US LLC
Pros:
If structured correctly, offers good asset protection against claims from property owned by the LLC, as well as generally against personal creditors.
Most flexibility in tax planning (on the US side).
Cleaner management structure if multiple owners and/or managers are involved.
May keep your personal name off certain local records if the LLC is the titled owner.
Cons:
The simplest LLC option, a single-member LLC (one owner) or a multi-member LLC (more than one owner), are seen as “pass throughs” by default, meaning no tax benefit compared to a direct holding in your name.
Some foreign jurisdictions do not recognize LLCs cleanly, causing issues ranging from administrative hassles to poor tax consequences.
Additional annual filings and state-level compliance.
General Comments: A US LLC is often used for asset protection and ownership structuring among family members or partners.
Through a Local “C-Corp” Equivalent (i.e. from a US perspective, a Foreign Corporation)
Pros:
Well recognized in foreign jurisdictions and, in many cases, the default most foreign advisors will steer you to.
Strong liability segregation at the property level.
Familiar structure for local banks, partners, and notaries.
Potential access to local tax planning tools and deductions.
Cons:
Corporate-level tax on rental income and gains.
Potential second layer of tax on dividends.
Potential double tax issues in the US.
For US owners, possible exposure to Subpart F income and ongoing Form 5471 reporting. In most cases, this is a headache you’ll want to avoid!
Increased compliance and accounting costs both locally and in the US.
General Comments: A local corporation is often the cleanest structure from the foreign country’s perspective. But for a US person, it can introduce complex filing requirements back in the US that can add thousands of dollars per year to your US accounting bill. Unless you’re running a large organization, it’s rarely worth it.
Through a Local “LLC Equivalent” (i.e. from a US perspective, an entity that can potentially be classified as a passthrough.)
Important Note: I call this category a local “LLC” equivalent because, from a US perspective, it’s possible to have them classified as either a foreign disregarded entity or a foreign partnership, the same way that single-member LLCs and multi-member LLCs are treated in the US. In practice, in many countries, these “LLC Equivalents” are treated as corporations locally.
(Complicated? Yes.)
Pros:
May be treated as a “passthrough” locally, depending on the country.
Can potentially avoid corporate-level tax in the foreign jurisdiction.
Formed and governed under local law, so generally accepted by banks and professionals.
Can provide liability protection.
Cons:
Requires extra filing in the US.
Requires ongoing Form 8858 (disregarded entity) or Form 8865 (partnership) filings depending on the number of owners.
Foreign co-owners can add complexity.
Liability protection varies by jurisdiction and is not uniform.
General Comments: These structures are often attractive because, if we can get passthrough treatment in the US, we avoid most of the corporate-level distortion that comes with foreign C-corps. Income flows through. Foreign tax is generally paid where the property sits, and that tax can typically be credited against the US liability (either in the current year or carried forward).
Through Some Other Entity
This category includes holding companies in third countries, private foundations, unique civil law entities (for example, Liechtenstein’s Anstalt), nominee arrangements, or multi-tier structures that may involve holding and active entities.
Pros:
Can be tailored for complex estate planning or multi-country holdings.
May improve privacy in certain jurisdictions.
Can ring-fence multiple properties in different countries.
Cons:
Significantly higher setup and maintenance costs.
Increased audit and scrutiny risk if poorly managed.
Higher risk of structural tax inefficiency or double taxation if the structure is poorly designed. (Which, I must say, is more the rule than the exception when it comes to US clients.)
Layered reporting in the US and potentially multiple foreign jurisdictions.
Can make the properties hard to sell as a package in the future.
General Comments: These structures make sense only when the asset base or risk profile justifies them. For a single vacation property, it rarely makes sense. For a portfolio spread across several countries, they may be appropriate.
Through an IRA
Holding foreign real estate through an IRA is possible. It is also often misunderstood.
At a high level, the IRA—not you—owns the property. That changes who is taxed, who can use the property, and how money flows.
Pros:
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Rental income and capital gains are generally tax-deferred (traditional IRA) or tax-free (Roth IRA), assuming the structure is managed correctly.
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Potential long-term compounding without annual US income tax friction.
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You can build an effective asset diversification strategy free from tax considerations (again, so long as it’s set up and managed properly).
Cons:
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Absolute prohibition on personal use. You, your spouse, parents and grandparents, descendants, and other disqualified persons cannot use the property. Even minor personal benefit can trigger a prohibited transaction, which can create a big tax bill and penalties.
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Strict rules on transactions with related parties. You cannot personally manage it in a way that creates self-dealing.
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All expenses must be paid from the IRA. All income must return to the IRA. No commingling. This alone can create administrative hassles and cashflow headaches without proper planning.
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Financing is limited to non-recourse debt. If debt is used, Unrelated Business Taxable Income (UBTI) may apply, which can actually create a tax bill within the IRA.
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Local taxes still apply. The foreign country does not care that the owner is a US IRA. Any foreign tax paid reduces the return inside the IRA. In a traditional IRA, you may pay US tax later when you take distributions, even though the income was already taxed abroad. That layering can materially reduce the overall benefit.
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Custodian requirements and administrative friction. Many IRA custodians are not equipped to handle foreign real estate smoothly.
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Many foreign jurisdictions are unfamiliar with US retirement accounts and may not readily accept an IRA as a property owner without using a blocker entity. That adds cost and complexity.
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From a compliance standpoint, the IRA structure does not eliminate local reporting, property tax, transfer tax, or inheritance regimes in the foreign country. It only affects how the US taxes the income. So again, more complexity.
An IRA structure makes sense only if the property is purely an investment, you are prepared to follow the rules rigidly, and the expected return justifies the added administrative complexity. For personal-use property, it is not viable.
Which Structure is Best?
As you can see, there are quite a few options to consider. Which one is the right fit for you ultimately depends on what you’re trying to accomplish. Three variables drive almost every decision:
Your Objectives
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Are you buying for personal use, rental income, or long-term appreciation?
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Is your primary concern estate planning, tax efficiency, liability protection, privacy, or simplicity?
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Do you intend to hold the property for decades, or is this a shorter-term investment?
If you aren’t clear about your priorities, it’s unlikely the structure will meet your needs. The same property can justify completely different planning depending on whether the goal is legacy planning, maximum yield, asset protection, or you simply want to keep things as simple and cheap as possible.
Jurisdictional Rules
Each country says what’s allowed, what ownership types are available, how income and gains are taxed (and how high), and how property passes at death.
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Some jurisdictions work well with trusts. Others do not.
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Some work well with US companies. Others do not.
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Some impose inheritance taxes or forced heirship regardless of what your US planning says.
Too many people make the mistake of focusing too much on the US side of things. That’s important for sure, but you really need to give the other country’s rules a lot of thought. Because compliance is not optional.
The Investment Size
A modest vacation apartment does not justify the same level of structuring as a multi-million-dollar rental portfolio.
Over-structuring a small asset wastes time and money. Under-structuring a large one creates risk.
When you weigh these three variables together—your objectives, the jurisdiction, and the size of the investment—the answer usually becomes clearer.
There’s really no right answer, only one that’s right for you.
And if you’re considering either:
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Buying your first offshore property or
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You have a portfolio and are looking to expand
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Or you’ve already committed to multiple properties under development but haven’t addressed these key planning issues.
… feel free to get in touch to see how we can help.
About The Author
We have 40+ years experience helping Americans move, live and invest internationally…
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We have 40+ years experience helping Americans move, live and invest internationally…
