Cross-Border Taxation

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 What may look like a smart move into international property can sometimes come with unexpected U.S. tax consequences. If you’re a U.S. person investing abroad, you could find yourself subject to complex rules around Controlled Foreign Corporations (CFCs).

A CFC is any non-U.S. corporation where U.S. shareholders (each owning at least 10% of the company) collectively own more than 50% of the stock. On paper, setting up a foreign corporation to hold real estate can make sense—it may protect you legally, give you access to local financing, or align with local law requirements. But here’s the catch: once that entity qualifies as a CFC, U.S. tax law requires you to recognize certain types of the corporation’s income on your personal U.S. tax return—even if no money is distributed to you.

That means income like rents, gains from sales, or even deemed income under Subpart F and GILTI (Global Intangible Low-Taxed Income) rules can flow through to your U.S. tax return. The result? You may end up paying more U.S. tax than you would have if you had held the property directly in your own name. Plus, the reporting obligations (Form 5471, among others) are significant, and penalties for noncompliance are steep.

Still, that doesn’t mean foreign real estate investing is off the table. With the right structure, there can be investment advantages such as the following:

· Portfolio diversification outside the U.S.

· Potential exposure to growing real estate markets abroad.

· Currency diversification and hedging benefits.

· Long-term estate and wealth planning opportunities when structured correctly.

The key is understanding the tax traps before you buy—and designing your investment in a way that avoids unnecessary U.S. tax costs.

At Gibson Tax & Legal Group, we assist clients evaluate cross-border investments, explain the tax implications of CFC rules, and structure deals to minimize surprises. If you’re considering buying real estate abroad, let’s talk about the smartest way to do it.