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A foreign investor may invest in US real property directly, or through a domestic or foreign partnership, limited liability company or corporation.
If a foreign person is not considered to be engaged in a US trade or business with respect to its real estate activities, and does not elect to be so considered, that person will be subject to withholding tax (WHT) of 30%, or a lower treaty rate, on the gross amounts derived from the US real property.
If a foreign person is considered to be engaged in a US trade or business with respect to its real estate activities, or elects to be so considered, it will be subject to regular tax on its US net rental income at a maximum rate for 2012 of 35%. In the case of foreign corporations, an additional tax of up to 30% may apply under the branch profits tax (BPT) provisions.
Interest expense is generally deductible in calculating US net rental income. However, deductions for interest on loans made or guaranteed by related foreign persons may be deferred to the extent not paid, or limited if the borrower is considered thinly capitalised. Interest paid, or in certain circumstances deemed paid, to a foreign investor is generally subject to a 30% WHT, or a lower treaty rate. Non-contingent interest paid on portfolio debt from a foreign lender that owns a less than 10% interest in the borrower is not subject to US WHT.
Source : PWC
