Understanding U.S. Gift Tax Exposure for Foreign Real Estate Investors

After examining the U.S. estate tax risks faced by foreign investors, this article explores another often-overlooked issue: U.S. gift tax exposure. While estate tax applies at death, gift tax applies during life when a foreign individual transfers U.S. property to a family member or beneficiary. Because even fewer countries have gift tax treaties with the United States than estate tax treaties, most international investors are fully exposed to the same 28% to 40% tax rate on the fair market value of any gifted property. This article explains when gift tax applies, how entity structures can change the outcome, and what steps foreign investors can take to minimize or eliminate exposure through strategic planning.

Building on Our Prior Article: The Estate Tax Trap

In our previous article, “Understanding U.S. Estate Tax Exposure for Foreign Real Estate Investors,” we explained how foreign citizens and residents who own property in the United States face significant U.S. estate tax liability upon death, often ranging from 28% to 40% of the property’s value, with only a $60,000 exemption.

That article also highlighted that only a handful of countries—including Australia, Austria, Denmark, France, Germany, Japan, and the United Kingdom—have both estate and gift tax treaties with the United States.

But while some investors may have at least limited protection under those treaties for estate tax, even fewer treaties provide any protection against U.S. gift tax. And this difference can be just as costly.

Why Gift Tax Is the Hidden Twin of the Estate Tax

While estate tax applies at death, U.S. gift tax applies during life when a foreign individual gives away U.S. property.

If you are from a country that does not have a U.S. gift tax treaty—and most do not—then gifting U.S. real estate to your children or family members can trigger a gift tax at the same rates as the estate tax (28% to 40%), calculated on the fair market value of the property at the time of the gift.

This means that simply transferring your Miami condo or New York investment property to your child, even without receiving any payment, can result in a large and unexpected U.S. tax bill.

Countries With Gift Tax Treaties — and Why They’re Even Fewer

As discussed in our prior article, only seven countries—Australia, Austria, Denmark, France, Germany, Japan, and the United Kingdom—have gift tax treaties with the United States.

Residents of all other countries—including Italy, Spain, Switzerland, Canada, and most of Latin America—have no treaty protection for gift tax purposes.

Even among treaty countries, the terms differ widely, so it is essential to review the specific treaty language before making any transfer. A treaty may limit gift tax only for certain assets, or only if both donor and donee are residents of the treaty country at the time of the gift.

When a Gift of U.S. Real Estate Triggers U.S. Gift Tax

Under U.S. tax law, a gift of U.S.-situs property by a foreign person is generally subject to U.S. gift tax.

That includes:

• Direct transfers of U.S. real estate to children, relatives, or others
• Transfers of ownership interests in certain U.S. entities that hold U.S. property

The taxable amount is the fair market value of the property on the date of the gift, not the original purchase price.

For example:
If your father, a resident of Italy, owns a Florida property worth $600,000 and gifts it to you, the IRS could impose a gift tax of approximately $180,000—the same amount that would have been due under the estate tax had he passed away owning it.

Gifting Through a Company: When the Rules May Differ

In some cases, owning real estate through a company—such as a foreign corporation or properly structured entity—can reduce or eliminate U.S. gift tax exposure.

This is because the gift of shares in a foreign corporation is not generally considered a gift of “U.S.-situs” property under U.S. tax law. However, the specific type of entity and its tax classification are crucial.

• A U.S. LLC owned by a foreign individual is typically “disregarded,” meaning the IRS still treats the gift as if the property itself was transferred.
• A foreign corporation, on the other hand, may shield the property from gift tax—if properly structured and maintained.

Because of these distinctions, it is vital to consult a professional before transferring any ownership interests. An incorrectly structured entity could unintentionally trigger the very tax you are trying to avoid.

The “Tax Basis” Trap: Why a Gift Can Create Future Capital Gains

Another important difference between a gift and an inheritance is how the “tax basis” of the property is determined.

The tax basis is the amount used to calculate capital gain when the property is sold.

• If you inherit a property after someone’s death, your basis is typically “stepped up” to the property’s market value at the date of death.
• But if you receive the property as a gift, your basis is the same as the donor’s original purchase price, often much lower.

For example:
If your father bought a Miami condo for $200,000 twenty years ago and gifts it to you today when it’s worth $600,000, your basis remains $200,000.

If you later sell the property for $600,000, you would owe capital gains tax on the $400,000 increase, even though you personally never profited from the appreciation.

This “carryover basis” rule can significantly increase the tax burden for future sales and is a key reason to carefully weigh whether gifting or inheritance is the better strategy.

How to Prevent or Minimize Gift Tax Exposure

If you or your family own U.S. real estate and are considering transferring it, a few key strategies may help minimize exposure:

• Review your ownership structure before making any transfer.
• Consider holding property through a foreign corporation or trust where appropriate.
• Avoid direct lifetime transfers of U.S. real estate without professional advice.
• Coordinate estate and gift tax planning together to ensure that both risks are addressed.

Early planning is essential—once the gift is made, it is too late to restructure or claim treaty benefits retroactively.

Why Professional Cross-Border Planning Is Essential

Cross-border estate and gift tax planning requires a detailed understanding of both U.S. tax law and your home country’s rules. The wrong move can trigger double taxation or create an unintended capital gain at sale.

Even if your country has an estate tax treaty with the U.S., it may not include gift tax provisions, and even where it does, the coverage may be incomplete or conditional.

That’s why every international family should have their current structure and future transfers reviewed by a qualified U.S. international tax attorney before making any decision.

Work With Experienced International Tax Counsel

At Bianchi Fasani Green Law, we help international families and real estate investors protect their wealth through strategic estate and gift tax planning. Our team advises clients across Europe, Latin America, and beyond on how to structure U.S. real estate holdings to minimize taxes on both lifetime transfers and inheritance.

If you or your parents own U.S. property and are considering gifting or transferring it, contact us today. We can help you understand the potential tax implications and design a plan to preserve your family’s investment for generations to come.