NEW YORK, NY - Foreign nationals investing in U.S. real estate can face significant tax exposure, including federal estate tax rates of up to 40 percent on directly held property, if they purchase without considering ownership structure. NYC foreign investment attorney Natalia A. Sishodia of Sishodia PLLC (https://sishodia.com/llc-vs-corporation-vs-trust-for-foreign-real-estate-buyers/) outlines how LLCs, corporations, and trusts each affect liability, income tax, and long-term estate planning for international buyers entering the New York market.

According to NYC foreign investment attorney Natalia A. Sishodia, the U.S. tax framework treats foreign investors very differently from domestic ones, and the gap is most striking on the estate tax side. "U.S. citizens and residents can pass on nearly $14 million in assets tax-free in 2025," Sishodia explains. "A nonresident alien owning U.S.-sited assets, including real estate, has only a $60,000 exemption, with anything above that potentially taxed at rates up to 40 percent. That exposure alone makes direct ownership a poor choice for most foreign investors."

NYC foreign investment attorney Natalia A. Sishodia points out that rental income is also taxed unfavorably by default. The Internal Revenue Code generally treats rental income earned by foreign investors as Fixed, Determinable, Annual, or Periodical income, subject to a flat 30 percent withholding on gross rents with no deductions. A net basis election under Section 871(d) allows the income to be treated as effectively connected with a U.S. trade or business, which permits deductions for property taxes, mortgage interest, and operating expenses and allows taxation only on net income at graduated rates.

The Limited Liability Company is often the default starting point because it combines liability protection, pass-through taxation, and operational flexibility. A single-member LLC is treated as a disregarded entity, and a multi-member LLC is generally classified as a partnership, so income flows through to the members' returns rather than being taxed at the entity level. The drawback is that an interest in a U.S. LLC is generally treated as U.S.-situs intangible property for estate tax purposes, which means an LLC alone does not solve the estate tax problem for nonresident aliens.

Attorney Sishodia notes that forming an LLC in New York carries unique administrative costs, including the state's publication requirement. Within 120 days of formation, the LLC must publish notice of its establishment in two newspapers designated by the county clerk for six consecutive weeks, and publishing costs in New York City frequently exceed $1,500. "Owners also need to follow developments under the Corporate Transparency Act," Sishodia adds. "FinCEN's beneficial-ownership rules and the residential real estate rule have shifted significantly in 2025 and 2026, and foreign clients need current advice to avoid penalties."

For investors focused on eliminating U.S. estate tax exposure, the C corporation can serve as a blocker entity. In a two-tiered structure, a foreign corporation owns a U.S. C corporation, which in turn holds title to the real estate. Because shares of a foreign corporation are non-U.S.-situs assets, they fall outside the U.S. estate even though the underlying real estate sits in New York. The trade-off is double taxation: corporate-level tax of 21 percent federally plus state and local tax, which in New York frequently produces a combined effective corporate rate in the mid-30s, followed by a 30 percent withholding tax on dividends to the foreign parent, often reduced under a bilateral tax treaty.

Sishodia adds that corporations also lose the benefit of preferential long-term capital gains rates, since gains from a sale are taxed at the same flat corporate rate as ordinary income. S corporation status, which would allow pass-through treatment, is unavailable because nonresident aliens cannot hold S corporation stock.

Trusts offer the most flexible long-term planning vehicle, particularly for high-net-worth families with multi-generational goals. "A foreign irrevocable non-grantor trust, structured properly, can remove U.S. real estate from the grantor's taxable estate while supporting privacy, asset protection, and orderly succession," Sishodia emphasizes. Outcomes depend heavily on retained powers, beneficiary residency, and compliance with reporting obligations such as IRS Forms 3520 and 3520-A. Trusts are also classified as domestic or foreign based on the Court Test and the Control Test, which together determine which set of U.S. tax rules applies.

For sophisticated investors, hybrid structures often deliver the best balance of protection and efficiency. A common approach involves an irrevocable trust that owns the membership interests of an LLC holding title to the property. The trust serves as the estate planning core, while the LLC handles day-to-day operations such as leasing, banking, and contracting. Together, these structures can eliminate estate tax exposure, contain liability, preserve privacy, and simplify management.

The firm regularly helps international clients evaluate where the property will be held, who the beneficiaries will be, and how distributions will be handled before any contract is signed. Decisions made at acquisition shape tax outcomes for years, and restructuring after closing typically triggers transfer taxes, recording costs, and potential capital gains consequences that can be difficult to absorb.

For foreign nationals preparing to acquire residential or investment property in New York, choosing the right ownership vehicle before closing is far easier than restructuring afterward. Consulting a foreign investment attorney early in the process may help align tax strategy, estate goals, and compliance obligations from the outset.

About Sishodia PLLC:

Sishodia PLLC is a New York City-based law firm focused on high-end residential and commercial real estate transactions, foreign investment structuring, condominium and cooperative matters, and cross-border estate and tax planning. Led by managing partner Natalia A. Sishodia, Esq., LL.M., the firm represents domestic and international clients from more than a dozen countries. For consultations, call (833) 616-4646.

Email: natalia@sishodialaw.com

Media Contact

Name
Sishodia PLLC
Contact name
Natalia A. Sishodia
Contact phone
(833) 616-4646
Contact address
600 3rd Ave 2nd floor
City
New York
State
New York
Zip
10016
Country
United States
Url
https://sishodia.com/