1. Is stamp duty, transfer tax or a similar tax payable on the direct sale, purchase or leasing of real estate? If so, what are the rates and who is required to pay the duty or tax?

At least 35 US states, and a number of counties and cities, impose a tax on the transfer of an interest in real estate. The definition of an “interest in real estate” varies by jurisdiction, and can include options and certain leasehold interests.

Rates in various states range from 0.1% to 5%, including local and county taxes (where applicable). Most jurisdictions impose the tax on the consideration paid for the real estate interest, while others base the tax on the value of the interest. Among the jurisdictions with the highest tax rates are Pennsylvania (rates vary by locality from 2% to 5%) and New York City (maximum combined state and local rate of 3.025%).

Some jurisdictions dictate which party is obligated to pay the tax, and in certain cases impose the primary payment obligation on one party and a secondary obligation on the other party. Where state or local law does not obligate a particular party, the parties must agree on which party will pay the tax.

2. Is stamp duty, transfer tax or similar tax payable on the indirect sale or purchase of real estate, e.g. by means of the sale of an SPV which holds real estate in the jurisdiction?

In the U.S., transfer taxes are often imposed on the indirect sale or purchase of real estate at the state or local level.  For example, New York State imposes an indirect real estate transfer tax on conveyances of real property or interests therein when the consideration exceeds US$500. Tax is computed at a rate of two dollars for each US$500, or fractional part thereof, of consideration.  An additional tax of 1% of the sale price (mansion tax) applies to residences where consideration is US$1 million or more. 

Local jurisdictions also impose their own transfer tax.  For example, properties transferred in Los Angelos, California are subject to a current county and city transfer tax rates of 0.11% and 0.45%, respectively.  The rates vary based on the state or local jurisdiction.

In most jurisdictions, these taxes are paid by the transferor but this rule can vary based on the jurisdiction.

3. Is there value added tax, goods and service tax or a similar tax payable on the sale or purchase of real estate, and the letting of real estate? If so, what are the rates and who is required to pay the tax?

No. However, state sales tax may be imposed on the transfer of personal property together with the real estate.  In transactions involving hotels, among other asset classes, the amount of personal property can be significant.  Where such sales tax is imposed on personal property, it generally ranges from 2.9% to 7%.

4. Are there any annual taxes that may be payable on the ownership of real estate, e.g., annual land tax, municipal taxes, surtaxes, etc.?

All 50 states and many municipalities impose annual real estate taxes at rates that vary widely by jurisdiction.  For owner-occupied housing in 2014, New Jersey had the highest effective annual real property tax rate of 2.33%, whereas Hawaii had the lowest at 0.28%.  State and local real estate taxes are generally deductible against federal taxable income, subject to certain limitations.

5. What is the rate of tax imposed on rental income?

US individuals are subject to federal tax on net rental income at graduated rates up to 37%.  An additional 3.8% Medicare tax generally applies to high-income earners on rental income not derived from an active business.

US corporations are subject to federal tax on net rental income at  21%.  Individual and corporate taxpayers may also incur state and/ or local income tax.  State and local tax rates vary by location, and may be significant.  A domestic corporation that earns rental income from real property located in New York City, for example, will be subject to an effective income tax rate of more than 35%.

Foreign investors are taxed on US-source rental income at a 30% rate without offsetting deductions, unless the rent is attributable to a US trade or business, in which case the investor would be subject to tax on net income at graduated rates that are the same as those paid by US investors.  A foreign investor may elect to be taxed on a net basis as if the rent were US trade or business income (“net election”).  Although higher marginal rates could apply in the case of a net election, the offsetting deductions for depreciation, interest, real estate taxes and other expenses typically would significantly reduce the investor’s overall tax burden.  The Medicare tax does not apply to foreign investors.

A foreign corporation that conducts an active rental business in the United States, or that makes a net election, may also be subject to a 30% branch profits tax on rents that are deemed repatriated from its US branch.  The branch profits tax may be reduced, or in certain cases eliminated, by an applicable double tax treaty.

6. Is interest on borrowings used to acquire real estate deductible for tax purposes against rental income? If so, (i) are there any restrictions, such as thin capitalisation, transfer pricing or interest limitation rules; and (ii) is there any withholding tax on interest?

Interest on borrowings used to acquire US real estate is generally deductible against rental income for US federal income tax purposes. Deductibility of interest for state and local income tax purposes varies by jurisdiction.

Foreign investors can deduct interest on borrowings used to acquire US real estate only against rental income that is attributable to an active rental business.

If acquisition debt issued by a corporation is re-characterized as equity for tax purposes, the interest payments generally will be treated as non-deductible dividends.  If debt issued by a partnership is so re-characterized, the interest payments may in certain circumstances be treated as non-deductible.  In order for debt to be respected for tax purposes, there generally must be a reasonable expectation of repayment and market terms.

Business interest expense deductions are limited to 30% of adjusted taxable income (ATI) plus business interest income. The calculation of ATI is similar to EBIT.  An exception to the business interest expense limitation, however, is provided for an electing real property trade or business (RPTOB). If a RPTOB election is made, the election is irrevocable and the taxpayer would generally be required to use longer depreciation lives to depreciate its real property assets.

Under the passive loss rules, individuals may deduct interest expense in a taxable year only to the extent of rental income and income from other passive activities.  Any disallowed interest expense can be carried forward to offset rental income or other passive income in subsequent taxable years. The passive loss rules do not apply to real estate professionals who materially participate in active rental real estate businesses.

To the extent not taken into account under the passive loss rules, interest paid by an individual may be subject to limitation on deductibility under the investment interest limitation rule. This rule generally limits the deductibility of investment, rather than business, interest expense to the amount of the taxpayer’s net investment income.

Under US Treasury Regulations, certain related-party debt issued by US corporations may be re-characterized as stock to the extent that (i) certain threshold documentation requirements are not satisfied or (ii) the debt instrument is issued to a controlling shareholder in a distribution or in another transaction that achieves an economically similar result.

Under US transfer pricing rules, the Internal Revenue Service (IRS) may reallocate income among related taxpayers with respect to intercompany loans that do not bear an arm’s-length interest rate.

Foreign investors are subject to a 30% withholding tax on interest payments received from US sources, unless the interest is effectively connected with a US trade or business.  This withholding tax may be reduced or eliminated under an applicable double tax treaty.

The United States does not impose withholding taxes on “portfolio interest.” Portfolio interest generally includes non-contingent interest paid on certain US registered obligations, unless the interest is received by:

• A controlled foreign corporation from a person related to the issuer
• A bank on an extension of credit pursuant to an ordinary course lending agreement, or
• A 10% shareholder of the issuer

7. Are deductions for capital expenditure available against rental income for tax purposes, for example, capital allowances or deductions for depreciation? If so, are deductions available for expenditure on both land and buildings, or on buildings only?

US persons who own real property can claim depreciation deductions for property used in a trade or business or held for the production of income.  Foreign investors can claim depreciation deductions for real property if the property is used in the active conduct of a US trade or business or if a net election has been made.

Depreciation deductions can be claimed only for that portion of real property which is depreciable.  Because land is not depreciable, an allocation must be made between the value of improvements and the underlying land.  Under the Modified Accelerated Cost Recovery System (MACRS), commercial real estate generally is depreciable over 39 years, using a straight-line method.  Residential real estate is depreciable ratably over 27.5 years.  Certain components of improved real estate may be eligible for depreciation over shorter periods of time.

8. Are there any other material restrictions on the costs and expenses which may be reduced in calculating a person’s taxable rental income, e.g. transfer pricing or anti-hybrid rules?

There are several restrictions on the costs, including the passive loss rules. Under these rules, individuals may deduct costs only to the extent of rental income and income from other passive activities.  Any disallowed expenses can be carried forward to offset rental income or other passive income in subsequent taxable years.  The passive loss rules do not apply to real estate professionals who materially participate in active rental real estate businesses.

Under US transfer pricing rules, the IRS may reallocate income among related taxpayers to the extent such income does not reflect an arm’s-length transaction.

US anti-hybrid rules disallow deductions for interest in the case of certain related party payments pursuant to hybrid arrangements or that involve hybrid entities.  The rules are intended to address situations where a taxpayer is provided a deduction under US tax law but the payee does not does not have a corresponding income inclusion under foreign law.

9. Are there any restrictions on the use, and/or the carry-forward, of losses?

For US federal income tax purposes, net operating losses (NOLs) generally can be carried forward indefinitely but are limited to 80% of each subsequent year’s net income.  Corporate NOLs may be subject to further restriction upon certain shifts in ownership of the corporation’s stock.

For state and local income tax purposes, the calculation of NOLs, and the ability to carry back and carry forward such NOLs, varies by jurisdiction.

10. Are capital gains arising on the sale of real estate taxable? If so, what are the rates and are there any exemptions?

Yes, capital gains on real estate are taxable.

Although a foreign person is generally not subject to US federal income tax on capital gains (subject to certain exceptions), there is a general exception for capital gains realized on the disposition of a US real property interest.  US real property interests include parcels of US real property and stock in a US corporation the assets of which predominately consist of US real estate, i.e., a US real property holding corporation (USRPHC), and certain other interests in US real property.

State and local income taxes may also be imposed on capital gains on real estate.

For individuals, if the real estate has been held for one year or less, or if the seller is a “real estate dealer,” a gain recognized on the sale of real estate is subject to US federal income tax at graduated rates of up to 37%.  By contrast, long-term capital gains on the sale of real estate not held as inventory generally are taxable at a preferential US federal income rate of 20% (though recapture of a gain attributable to past depreciation deductions will be taxed at a 25% rate).

An additional 3.8% Medicare tax generally applies to US high-income earners on gains not derived from the ordinary course of a trade or business.  In addition to federal taxes, state and local income taxes may also be imposed on capital gains.

For corporations, capital gains recognized on the sale of real estate are subject to US federal income tax at 21%, and may also be subject to state or local income taxes.  A foreign corporation that held the real estate in a US trade or business, or that has made a net election, may also be subject to a 30% branch profits tax on capital gains that are deemed to be repatriated from the US branch (subject to reduction or elimination under an applicable US tax treaty, as noted above in Question 5).  However, a branch termination exception may apply to the taxable year in which a foreign corporation completely terminates all of its US trade or business activities.

11. Are capital gains arising on the indirect sale of real estate taxable, e.g. by means of the sale of an SPV which holds real estate in jurisdiction? If so, what are the rates and are there any exemptions?

A foreign person is subject to tax on capital gains arising on the sale of stock of a US corporation that is a USRPHC.  In the case of a foreign individual, a 20% federal income tax generally would apply if the stock was held for more than one year, but ordinary rates would apply if the stock was held short term.  A foreign corporation would pay 21% federal income tax on the gain.  Gain from the disposition of stock in a USRPHC is generally not subject to US branch profits tax.  In addition, as discussed below, purchasers of stock of a US corporation that is a USRPHC are generally required to withhold from the purchase price a tax equal to 15% of the total consideration.

Stock of a foreign corporation held by a foreign person can be sold free of US tax.

12. Is there a withholding tax on rental income?

No withholding tax is imposed on rental income or capital gains received by US persons.  Generally, there is a 30% US withholding tax on US-source rental income received by foreign persons.

13. Is there a withholding tax on capital gains derived from real estate? If so, does the withholding tax apply to both direct and indirect sales, or to direct sales only?

Under the Foreign Investment in Real Property Tax Act (FIRPTA), purchasers of US real property interests from foreign persons are generally required to withhold from the purchase price a tax equal to 15% of the total consideration.  Any amount so withheld may be applied as a credit against the federal income tax liability of the foreign seller and may be recovered as a refund in the event of overpayment if the withholding tax collected exceeds the seller’s US tax liability on the capital gain.  FIRPTA withholding applies to direct sales and certain indirect sales (i.e., sales of stock of a US corporation that is a USRPHC).

14. Does the jurisdiction have a REIT regime? If so, please outline the tax treatment of the REIT and the main conditions that must be satisfied to enter and remain within the regime.

Real estate investment trusts (REITs) can provide a tax-efficient investment structure for investments in US real estate, because a REIT’s income generally is subject to only one level of US federal income tax.  The single level of tax is accomplished by permitting REITs to deduct dividends paid, which dividends are then reported as income by shareholders.

The US federal income tax rate for non-US shareholders is 30%, subject to reduction under an applicable US tax treaty.  The reduced treaty rate typically is not available for capital gain dividends, which occur when a REIT distributes the proceeds from its sale of real estate.  Under FIRPTA, non-US shareholders generally are subject to the FIRPTA tax on capital gains realized on the sale of REIT shares.  Under a FIRPTA exception, foreign investors can avoid US federal income tax on capital gains tax on sale of stock in a domestically controlled REIT.  REITs may also be subject to state and local income tax.

While REITs offer a tax-efficient structure for investments in US real estate, they are not suitable for all investments, as only certain asset classes qualify as permissible REIT assets.  For example, an investor planning to acquire a US condominium development project would not do so through a REIT, as gain realized on the condominium units would be subject to a 100% tax on income from so-called dealer activities.

15. Apart from REITs, are there any tax-efficient real estate investment vehicles or structures which are commonly used to acquire, hold and exploit real estate in the jurisdiction?

See question 16, below.

16. Are there any structures commonly used to mitigate real estate tax liabilities on acquiring and/or disposing of real estate?

Foreign investors commonly invest in US real estate through a corporate leveraged blocker structure, in which the foreign investor owns a non-US corporation (the “foreign blocker”), which in turn owns a US corporation (the “US blocker”).  The US blocker then purchases the interest in the US real estate.  The reasons for this structure include:

• The US blocker insulates the foreign blocker from branch profits tax and FIRPTA withholding
• The foreign blocker shields the foreign investor from US estate tax exposure
• Neither the foreign blocker nor the foreign investor would be required to file US tax returns

Although income from the real property will be subject to US federal corporate-level income tax at 21%, the overall tax burden can be substantially reduced if the US blocker is capitalized with a combination of debt and equity, because the interest payments should reduce the US tax base.

For example, if the foreign investor qualifies for a treaty-reduced 10% withholding rate on interest, each dollar of interest paid to the investor trades a 26% corporate-level deduction (assuming a combined federal, state and local tax rate of 26%) for a 10% investor-level tax on the interest income.  Return of capital distributions are not taxable if a FIRPTA withholding certificate is obtained.  However, the debt instrument held by the foreign blocker may be re-characterized as stock under recent debt-equity regulations to the extent that a distribution by the US blocker exceeds accumulated earnings and profits.

Further, although dividends from the US blocker generally are subject to withholding tax at a rate of 30%, this rate may be reduced by treaty.

Additionally, the FIRPTA tax does not apply to a liquidating distribution by the US blocker, which is made only after the corporation first sells all of its real estate in taxable transactions (i.e., the cleansing exception).  To facilitate the cleansing exception, foreign investors typically hold each real estate investment through a separate US blocker.

Foreign investors who reside in high-tax jurisdictions may prefer to invest in US real estate through an unblocked structure, either directly or through a flow-through entity.  This structure typically works better if the investor can qualify for the preferential US capital gains tax rate (i.e., an individual) and does not mind filing US tax returns. 

17. Are there any material differences in the way individuals and companies are taxed on acquiring, letting and/or disposing of real estate?

Perhaps the most important difference concerns the federal taxation of capital gains arising from the sale of real estate.  Individuals can qualify for preferential US capital gain tax rates of 20% if the property is held for more than one year, whereas corporations will be subject to regular federal tax rates of 21% on the same gains (plus, potentially, branch profits tax as discussed above).  Other material distinctions relate to limitations on the deductibility of interest and other expenses incurred in connection with real estate investments.  Finally, the additional 3.8% Medicare tax on net investment income applies only to individuals (but does not apply to foreign persons).

This guide does not constitute tax advice and readers should note that the laws of each jurisdiction are regularly refined and/or revised, so the statements made in this report are not definitive. However, this guide does provide a summary overview of the state of the law as at 31 January 2025 and will hopefully serve as a useful tool for investors to ensure they understand the unique provisions and distinctions in the various jurisdictions.