Cross-Border RE Deals: FIRPTA, Withholding, CFIUS

Introduction

When a foreign investor buys US real estate, the deal carries an overlay of tax and security rules that can reshape its structure before the economics are even discussed. Two regimes dominate. FIRPTA is the tax law that ensures foreign owners pay US tax on the gain when they sell US property, and CFIUS is the national-security screen that can block or unwind a foreign acquisition near a sensitive site. Between them they explain why so much foreign capital reaches US real estate through elaborate ownership structures rather than direct purchases, and why a cross-border deal team spends as much time on jurisdiction and clearance as on price.

The United States generally does not tax foreign investors on their capital gains, which would let a foreign owner sell US real estate tax-free. The Foreign Investment in Real Property Tax Act closes that gap. It treats gain on the disposition of a US real property interest as income effectively connected to a US trade or business, so a foreign seller owes US tax on it just as a domestic seller would.

FIRPTA

The Foreign Investment in Real Property Tax Act, which subjects a foreign person's gain on the sale of a US real property interest to US income tax. To enforce collection, the buyer must withhold a percentage of the gross sale price and remit it to the IRS, with the seller reconciling the actual tax on a US return.

Enforcement runs through withholding. Because the IRS cannot easily chase a foreign seller after closing, it puts the obligation on the buyer, who must withhold a portion of the gross purchase price and remit it. The PATH Act raised that withholding rate from 10% to 15% of the price, a meaningful amount of trapped cash given it is computed on the gross sale price rather than the gain, which the seller then reconciles against its actual tax liability on a US filing. The mechanics make FIRPTA impossible to ignore: it is not a back-office formality but a real drag on a foreign seller's proceeds and timing.

The single most important FIRPTA planning tool is the domestically controlled REIT. Although gain on directly held US property is a US real property interest, the shares of a domestically controlled REIT are not, so a foreign investor who owns US real estate through such a REIT can sell those shares free of FIRPTA. This is the structural reason foreign capital so often enters US real estate through a REIT rather than by buying buildings outright.

Domestically controlled REIT

A REIT in which less than 50% of the value of the stock has been held, directly or indirectly, by foreign persons during the relevant five-year lookback period. Because its shares are not treated as a US real property interest, gain on a sale of those shares escapes FIRPTA, making the status a prized structuring goal for foreign investors.

The status is exacting and has recently grown harder to engineer. Final Treasury regulations effective in April 2024 added a look-through rule that, for purposes of the under-50% test, looks through certain domestic C-corporations to their foreign owners, shutting down a common technique in which foreign investors inserted a US corporate blocker to keep a REIT nominally domestically controlled. The change forced existing structures to be re-examined and is a live example of how cross-border tax planning is a moving target rather than a settled checklist. Beyond the domestically controlled REIT, foreign investors also use leveraged corporate blockers to convert taxable gain into lower-taxed interest deductions and choose holding jurisdictions for favorable treaty access, all of which is why the REIT qualification rules and the REIT-versus-C-corp tax stack sit at the center of inbound structuring.

FIRPTA addresses the exit, but a foreign owner is also taxed on the income the property throws off along the way. Rent that is not treated as effectively connected income can face a flat 30% withholding on the gross amount, which is punitive because it allows no deductions, so foreign investors typically elect to treat the income as effectively connected and pay tax on the net, or hold through a structure that achieves the same result. Distributions and interest paid out of the structure carry their own withholding.

This is where tax treaties matter. A bilateral treaty between the US and the investor's home country can reduce the withholding rate on dividends and interest, sometimes substantially, which is why the choice of holding jurisdiction is a deliberate decision rather than an accident of where the investor happens to sit. An investor based in a country with a strong US treaty network, or one that routes its investment through such a jurisdiction, may cut a 30% withholding rate to 15%, 5%, or even zero on certain flows, though anti-treaty-shopping rules increasingly require genuine substance in the holding jurisdiction rather than a nameplate entity. Sovereign and pension investors add another layer, since some sovereign investors qualify for special exemptions on certain US investment income, one reason the in-house teams of sovereigns and pensions structure their US real estate so carefully. The general real estate tax fundamentals that govern domestic owners still apply, but for foreign capital they are layered under this withholding overlay.

Tax is only half the cross-border picture. A foreign acquisition of US real estate can also trigger review by CFIUS, the Committee on Foreign Investment in the United States, which screens transactions for national-security risk. Real estate falls within CFIUS jurisdiction chiefly when a property sits near a sensitive military or government installation, and the perimeter has been expanding. A final rule effective in December 2024 added dozens of installations and extended the review radius around many of them, with some sites carrying a one-mile perimeter and others a 100-mile perimeter, bringing CFIUS coverage to more than 250 military and government sites.

Data centers have become the focal point of this scrutiny, because they house sensitive data, can serve government tenants, and sit at the heart of national infrastructure, a set of triggers explored in CFIUS and national-security data-center deals. The practical effect across all sectors is that a cross-border deal team plans for clearance from day one, choosing buyers, consortium partners, and structures that ease review rather than provoke it.

FIRPTA and CFIUS together are what make cross-border real estate a specialist's game. The tax overlay dictates how a foreign investor should own US property, the security overlay dictates whether it can buy a given asset at all, and both have grown stricter in recent rule-making. A banker who knows the architecture of real estate M&A but not this overlay can structure a deal that works on paper and fails in practice, which is why inbound mandates route to teams that treat tax and clearance as the first questions rather than the last.