The tax-relief industry loves to make IRS problems sound impossible without them. They're not. I'm Darrin Mish. I've been representing taxpayers before the IRS for 32 years. Let me explain how this actually works.
The Inheritance That Creates Years of U.S. Tax Compliance
U.S. real estate frequently passes to foreign heirs – a U.S. parent leaves a Florida condo to children in Brazil, a U.S. grandparent leaves a Vermont farmhouse to grandchildren in France, a U.S. business owner leaves rental properties to heirs in India. The inheritance is legal and the foreign heir takes title without difficulty.
What follows is years of U.S. tax compliance obligations the foreign heir often does not anticipate. The compliance starts at the moment of inheritance and continues for as long as the foreign heir owns the property.
The Inheritance Itself – U.S. Tax Treatment
The inheritance is not income to the foreign heir. Under IRC Section 102(a), gifts and inheritances are excluded from gross income. The foreign heir receives the real estate without paying U.S. income tax on the inheritance value.
The estate of the deceased U.S. owner may have paid U.S. estate tax on the value of the property if the estate exceeded the federal estate tax exemption (currently approximately $13.99 million for 2026). That estate tax is a liability of the estate, not of the foreign heir.
The basis of the inherited property is the fair market value at the date of death (or alternate valuation date if elected by the estate). This is the “stepped-up basis” under IRC Section 1014. For most inherited U.S. real estate, this means the foreign heir’s basis is the appraised value at the parent’s death, not the parent’s original purchase price.
U.S. Estate Tax Filing for the Decedent’s Estate
If the deceased U.S. owner’s estate was required to file Form 706 (the U.S. estate tax return for a U.S. citizen or resident), the foreign heir generally does not need to participate in the filing – it is the estate’s responsibility.
If the deceased was a nonresident alien and the property was U.S.-situs, the estate must file Form 706-NA. This is less common in the context of foreign heirs inheriting from U.S. owners, but can apply when the foreign heir inherits from another nonresident alien who owned U.S. property.
The estate’s filing affects the heir indirectly – the heir’s basis in the property is established by the estate tax filing.
Rental Income Reporting
Once the foreign heir owns the U.S. real estate, ongoing income tax obligations attach to any income the property generates.
If the property is rented, the rental income is U.S.-source income to the foreign heir. The default treatment under IRC Section 1441 is 30 percent withholding on gross rent paid by the U.S. tenant or property manager. No deductions are allowed against this gross-basis tax.
A foreign heir who is actively managing the U.S. rental property may elect under IRC Section 871(d) to treat the rental income as effectively connected with a U.S. trade or business. This election allows net income taxation – rental income minus expenses – at U.S. graduated rates.
The Section 871(d) election is typically the much better answer. It allows deduction of property tax, depreciation, mortgage interest, insurance, repairs, property management fees, and other expenses. The net income (often substantially less than gross rent, sometimes a loss) is taxed at U.S. rates.
The election is made by filing Form 1040-NR with the rental income reported as effectively connected business income. The election applies for the year and subsequent years unless revoked.
The ITIN Requirement
To file Form 1040-NR, the foreign heir needs an Individual Taxpayer Identification Number (ITIN). The ITIN is obtained through Form W-7 with supporting identification documents.
Without an ITIN, the foreign heir cannot file a U.S. tax return. The 30 percent gross-basis withholding applies by default, and there is no mechanism to claim refunds or deductions.
Most foreign heirs inheriting U.S. real estate should obtain an ITIN early – ideally as part of the post-inheritance compliance setup. The ITIN process takes 8 to 14 weeks under normal conditions.
Annual Reporting Obligations
The foreign heir’s annual U.S. compliance obligations include:
Form 1040-NR if the heir has any U.S.-source income from the property (rental income, sale gain, or otherwise).
Form 8804/8805 reporting if the rental property is owned through a partnership with effectively connected income.
Form W-8BEN to provide to the U.S. payer (property management company, brokerage, etc.) certifying foreign status and any treaty benefits.
State income tax returns for the state where the property is located, if state tax applies.
Selling the Inherited U.S. Real Estate
When the foreign heir eventually sells the inherited U.S. real estate, two layers of U.S. tax apply.
FIRPTA withholding: the buyer withholds 15 percent of the gross sales price under IRC Section 1445. The withholding is paid to the IRS by the buyer.
Income tax on the gain: the actual U.S. tax on the gain is calculated on Form 1040-NR. The gain is sales price minus basis (stepped-up to fair market value at the original death). Capital gains rates apply if the property was held more than one year by the foreign heir.
The relationship between the FIRPTA withholding and the actual tax determines the refund or balance due. If the actual gain is small (because the stepped-up basis is close to the sales price), most or all of the FIRPTA withholding is refunded.
The combined sale-year filing requires the foreign heir to coordinate the FIRPTA documentation, the basis calculation, and the income tax return.
U.S. Estate Tax on the Foreign Heir’s Death
The most consequential issue for foreign heirs of U.S. real estate is the estate tax exposure on their own death.
U.S. real estate is U.S.-situs property under IRC Section 2104. When the foreign heir dies owning U.S. real estate, the heir’s estate is subject to U.S. estate tax on the property value above the $60,000 nonresident alien exemption.
This is the same issue discussed in the estate tax for foreigners analysis. The foreign heir who inherited U.S. real estate becomes a nonresident alien owner of U.S. real estate, facing the same estate tax exposure that any nonresident alien owner faces.
Planning techniques to mitigate this for the foreign heir include:
Transferring the inherited U.S. real estate to a non-U.S. corporation. The foreign heir owns the corporation; the corporation owns the property. Estate tax exposure at the foreign heir’s death is on foreign corporate stock, not U.S. real estate.
Selling the inherited property during the foreign heir’s lifetime and using the proceeds for non-U.S.-situs investments. The estate tax exposure shifts to the new holdings.
Holding the U.S. real estate through an irrevocable trust structure. Properly designed, the property can be removed from the foreign heir’s estate while still benefiting the family.
Multiple Foreign Heirs
When multiple foreign heirs inherit U.S. real estate jointly, each heir has separate U.S. compliance obligations.
Each heir typically owns a fractional interest (tenants in common). Each heir’s share of rental income is U.S.-source to that heir individually. Each heir files Form 1040-NR for their portion.
When the property is sold, each heir has FIRPTA withholding and capital gain on their fractional share.
Some families consolidate the inherited interest into a single foreign entity (corporation or trust) to simplify compliance. The restructuring has its own tax consequences but can substantially reduce ongoing compliance complexity.
State Tax Issues
Most U.S. states impose income tax on rental income from real estate located in the state, regardless of the owner’s residency. Florida, Texas, Tennessee, Nevada, and other no-income-tax states avoid this layer.
State tax on the sale of the property also applies in most states. The state return is filed separately from the federal return.
Some states (California, Hawaii, Maryland, Mississippi, New York, North Carolina, Oregon) impose their own withholding on nonresident sales of real estate, layered on top of federal FIRPTA.
If You Just Inherited and Have Not Been Filing
For foreign heirs who inherited U.S. real estate and have been receiving rental income without filing U.S. returns, the disclosure programs handle the catch-up.
The Streamlined Foreign Offshore Procedures cover non-willful failures by foreign-resident taxpayers. Three years of delinquent returns, six years of FBARs (if applicable), and a non-willful certification.
For foreign heirs who became U.S. residents (some inherited from U.S. parents and later moved to the U.S.), the Streamlined Domestic Offshore Procedures apply.
Three Steps for Foreign Heirs
First, get the ITIN. Without it, no compliance can happen.
Second, make the Section 871(d) election for rental income. Gross withholding without deductions is much more expensive than net income taxation.
Third, plan for the eventual sale or for the foreign heir’s own death. Lifetime restructuring can substantially reduce the estate tax exposure.
Get the Compliance Set Up Right
After 32 years of cross-border tax work, foreign heirs of U.S. real estate have one of the most predictable compliance patterns – if the structure is set up correctly from the start. Contact the Law Offices of Darrin T. Mish, P.A. at (813) 229-7100. We obtain the ITIN, file the annual returns, make the Section 871(d) election, and plan for the eventual sale and the foreign heir’s own estate.