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Opportunities for Foreign Persons to Maximize Tax Efficiency with U.S. Real Estate Investments by Pedro L. Porras, CPA

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Posted on August 17, 2026 by Pedro Porras

Despite a challenging global economy, the U.S. remains a top destination for foreign investment in commercial real estate. While there have been shifts in the countries from which those investment dollars are coming and the sectors in which foreign investors allocate those funds, the fact remains that the U.S. offers foreign buyers unique opportunities and tax advantages when they plan appropriately.

Under U.S. tax laws, the income nonresident aliens (NRAs) and foreign corporations earn from U.S. trade or business activities is subject to the same marginal tax rates as U.S. persons. By contrast, a 30 percent withholding tax applies to fixed, determinable, annual or periodical (FDAP) income received from U.S. sources unconnected with the conduct of a U.S. trade or business. Examples of these generally passive income sources include interest, dividends, royalties and rent payments. To ensure the U.S. collects tax on FDAP income, U.S. payors must withhold 30 percent from payments to NRAs and foreign corporations and pay that amount directly to the IRS. However, like most domestic tax laws, there are several exceptions to this rule.

For example, the amount of tax withheld from a payment to an NRA may be reduced or even eliminated when an income tax treaty exists between the U.S. and the foreign person’s home country. Additionally, a full exemption from the 30 percent withholding rate exists for portfolio interest, which the tax code defines as interest payments (including original issue discount) received by foreign investors on loans/debt obligations that meet specific statutory requirements.

What is the Portfolio Interest Exemption (PIE)?

Section 881 of the U.S. Tax Code deals with income tax liabilities imposed on foreign corporations that are not connected with a U.S. business. Under the Code, PIE enables foreign persons/entities to earn U.S. interest income free of U.S. income and withholding tax when they fund their investments with a debt instrument that meets certain criteria, including the following:

Maximizing the Benefits of PIE with Blocker Corporations

Rather than directly acquiring interests in U.S. real estate, foreign persons/entities may make their PIE eligible investments through a U.S. blocker corporation owned by one or more foreign corporations. The blocker corporation acts as a barrier between the foreign investors and their investments, essentially “blocking” U.S. real estate investment income from reaching foreign investors and enabling them to avoid U.S. tax and return-filing obligations with regards to U.S. effectively connected income coming from the underlying investment. Attention should be paid to the Foreign Investment in Real Property Tax Act (FIRPTA) in the case of disposition, restructuring, dividend or exit from the U.S. blocker. FIRPTA rules may require withholding and/or additional filing obligations.

Generally, the foreign investor funds the blocker corporation with both debt and equity and receives interest income from the blocker corporation free of U.S. withholding tax under the PIE regime. This is especially beneficial when a foreign investor’s home country does not have a tax treaty with the U.S. to eliminate withholding tax. When the foreign parent corporation is incorporated in a no-tax jurisdiction, such as the Cayman Islands or the Bahamas, it may also escape local income, withholding and capital gains taxes, and its shareholders may be exempt from paying tax on the dividends they receive from the foreign parent.

For U.S. tax purposes, the blocker corporation itself is treated as a domestic corporation subject to U.S. income tax on its taxable income, less certain deductions, at a maximum federal rate of 21 percent. One of these potential deductions is the blocker corporation’s portfolio debt-interest payments to the foreign parent.

Under prior law, these business interest expense deductions (BIE) were limited to 30 percent of the taxpayer’s adjusted taxable income (ATI), which was computed as the taxpayer’s earnings before interest and taxes (EBIT). This is no longer the case, as the One Big Beautiful Bill Act (OBBBA), enacted in 2025, adds depreciation and amortization back to the calculation of ATI, which, in turn, increases taxpayers’ BIE and the amount of interest payments they may deduct on portfolio debt loans.

The decisions to invest in the U.S. and choose an appropriate structure and financing for doing so should be made under the guidance of experienced CPAs and tax advisors with deep knowledge of cross-border activities. This planning for tax efficiency is critical not only at the time of the initial investment, but also down the road when foreign investors decide to sell those assets.

About the Author: Pedro L. Porras, CPA, is a principal in the Tax Compliance and Consulting practice of Baker Tilly x Berkowitz Pollack Brant, where he provides income and estate tax planning and consulting services to domestic and foreign high-net-worth families and closely held businesses with international operations. He can be reached at the CPA firm’s Miami office at (305) 379-7000 or info@bpbcpa.com.