USA Law and Practice Contributed by: Christopher Boyett, David Scott Sloan, Max Angel and Eric Bracy, Holland & Knight LLP
of the date of death. This allows heirs to sell inherited assets with little or no capital gains tax, since gains are measured from the stepped-up basis. In commu - nity property states, both halves of community prop - erty may receive a full step-up in basis, which can sig - nificantly reduce tax exposure for surviving spouses. At the federal level, long-term capital gains are taxed at up to 20%, or 28% for certain assets, while short- term gains are taxed at ordinary income rates. State treatment varies, with some states taxing capital gains as income and others imposing no income tax at all. Notably, the US tax system discourages basis-shift - ing transactions that are designed to create artificial losses or defer taxable gains. One such rule is the “wash sale” rule, which applies when a taxpayer sells a security at a loss and then acquires the same or an almost identical security within 30 days before or after the sale. In this case, the loss is disallowed for tax purposes and instead added to the basis of the newly acquired security, effectively deferring the loss until the replacement asset is sold. The rule applies across all accounts under the taxpayer’s control and is intended to prevent taxpayers from claiming tax ben - efits while maintaining the same investment position. Trust structures are also widely used for income tax efficiency. Intentionally defective grantor trusts (IDGTs) and grantor retained annuity trusts (GRATs) allow appreciation to be shifted out of the taxable estate while income remains taxable to the grantor, preserving favourable tax treatment. These tools are often combined with valuation discounts and other strategies to manage both income and transfer tax exposure. 1.4 Taxation of Real Estate Owned by Non- Residents Non-residents and non-citizens may generally pur - chase real estate in the United States without restric - tion under federal law, but they are subject to specific tax rules. When a non-resident sells US real prop - erty, the Foreign Investment in Real Property Tax Act (FIRPTA) generally requires the buyer to withhold 15% of the gross sale price and remit it to the IRS. This withholding is intended to cover potential capital gains tax owed by the foreign seller. The gain is treated as
effectively connected income and taxed at graduated rates unless reduced by treaty. Rental income from US real estate may generally be subject to a 30% withholding tax unless the owner elects to treat the income as effectively connected with a US trade or business, or the activities already rise to such level. This allows deductions for expenses such as interest and depreciation. Depreciation may be recaptured on sale and taxed at ordinary income rates. Common planning strategies include holding real estate through structures such as limited liability companies (LLCs) with foreign blockers or irrevoca - ble trusts. These structures can help manage liability, preserve privacy and reduce estate tax exposure. If properly structured, they may also avoid probate and facilitate succession planning. However, care must be taken to avoid inadvertently triggering US estate or gift tax, particularly where US persons are involved as beneficiaries or power holders. 1.5 Stability of Tax Laws US tax laws are subject to change, and the potential for future shifts plays a significant role in estate and income tax planning. While the current federal estate, gift, and GST tax exemptions are set at USD13.99 million per person in 2025, recently enacted legisla - tion will increase the exemption to USD15 million per person beginning in 2026. This increase has provid - ed some short-term clarity, but broader uncertainty remains, particularly around proposals to limit valua - tion discounts, eliminate the step-up in basis at death, or include grantor trusts in the taxable estate. Clients are responding to this uncertainty by accel - erating planning strategies that take advantage of current exemptions and rules. These include the use of dynasty trusts, grantor retained annuity trusts, and charitable lead or remainder trusts to shift apprecia - tion out of the estate while preserving income tax efficiency. Many are also making large lifetime gifts to lock in the current exemption before any future changes.
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