Blog Series #1: Structuring U.S. Real Estate Investments for Foreign Investors

Common Mistakes and Smarter Strategies

I’ve worked with many successful entrepreneurs, family offices, and investors from Asia and around the world who are interested in owning real estate in the United States. Whether it’s a $5 million apartment in Manhattan or a $100 million logistics hub in Texas, the conversation often begins the same way: someone recommends setting up a BVI company to buy the property.

That advice, while common, is often wrong—and in many cases, costly.

In this first part of my deep dive, I want to lay out the common mistakes I see, how tax laws actually work, and what I’ve found to be better approaches. These lessons come from real case studies. I’m not writing this as a tax advisor or lawyer, but as someone who has seen the outcomes of good and bad structuring, and wants to help investors avoid painful surprises.

The BVI Trap: It Looks Simple, But Isn’t

One of the most frequent mistakes is using a foreign company—typically a BVI corporation—to hold U.S. real estate. On paper, this seems like a clean way to separate the asset from the individual. It may offer privacy, but it creates significant exposure under U.S. tax law.

Here’s what actually happens:

1. FIRPTA applies. The Foreign Investment in Real Property Tax Act (FIRPTA) requires the buyer of the property to withhold 15 percent of the gross sale price when a foreign seller disposes of U.S. real estate. Even if you bought a property for $100 million and sell it at a loss for $50 million, the buyer is still required to withhold 15 percent of the $50 million. That money goes straight to the IRS unless an exemption is secured in advance.

2. No access to 1031 exchange. Foreign corporations are not eligible for tax-deferred exchanges under Section 1031 of the Internal Revenue Code, which allows investors to defer capital gains tax when selling and reinvesting in similar property.

3. No step-up in basis. If the property is held through a BVI company and the owner passes away, the heirs do not get a step-up in basis. They may inherit a taxable gain, which can create unnecessary tax burdens for the next generation.

4. Lack of clarity in estate planning. A foreign company holding U.S. assets can be challenged or heavily taxed under U.S. estate tax rules, especially if there are U.S. heirs or if the structure is viewed as abusive.

   
   

A Better Approach: U.S. C-Corporation Holding Structure

An alternative that more sophisticated investors are now considering is to use a U.S. C-corporation to directly own the real estate. This isn’t perfect, but it often provides better flexibility and access to tax strategies.

Key benefits include:

• Eligibility for 1031 exchanges. A U.S. corporation can buy and sell real estate and reinvest the proceeds tax-deferred.

• Access to U.S. banking and financing. Lenders are often more comfortable dealing with U.S. entities.

• More predictable tax filing. A U.S. corporation files a U.S. corporate tax return, pays tax at a flat 21 percent on gains, and the compliance is straightforward.

• Possibility of better exit planning. With proper structuring, the shares of the U.S. corporation may be sold rather than the property itself, in certain scenarios.

  
  

Case Study: Southeast Asian Investor Avoids FIRPTA Nightmare

A family office I worked with wanted to invest in commercial logistics space in the Midwest. Their lawyer initially proposed a BVI structure. I walked them through the risks—especially FIRPTA and the lack of 1031 exchange eligibility. We pivoted to setting up a Delaware C-corporation as the direct owner.

They bought the property through the U.S. entity, used interest deductions to reduce net taxable income, and already have plans to roll into a larger property using a 1031 exchange. The paperwork is cleaner, the tax position more defensible, and future options remain open.

Not About Zero Tax—About Smart Tax

Foreign investors sometimes come into this process asking, “How can I pay zero tax?” That’s rarely realistic when investing in U.S. real estate. The better mindset is: “How do I structure this to manage risk, plan for liquidity, and protect my heirs?”

In the second part of this series, I’ll cover more advanced structures—foreign non-grantor trusts, estate tax exposure, what happens when the grantor dies, and why tax treaties often don’t help with U.S. real estate. I’ll also explain how to reinvest capital inside a trust without triggering distributions and capital gains tax at the beneficiary level.