The $13 Million Mistake: A Hidden Tax Trap for Foreign Nationals Owning U.S. Real Estate

Imagine two neighbors in Los Angeles, each owning an identical $2 million home. When they pass away, both families begin the probate process. The first family inherits the home free and clear. The second is stunned to receive a potential seven-figure tax bill from the IRS.

This isn't a hypothetical—it's a reality dictated by a critical distinction in U.S. tax law.

These insights, shared by leading cross-border tax attorney Yiyan Cao at a recent Arcadia Association of Realtors event, are essential for any executor, attorney, or international investor involved in U.S. real estate.

The Standard: A ~$13 Million Shield

For a U.S. citizen or a resident domiciled in the U.S., the federal estate tax exemption is substantial. In 2025, it's projected to be around $13.99 million per person. This means an individual can pass on up to that amount in worldwide assets without their estate owing any federal estate tax. For most families, this shield is more than enough to protect their legacy.

The Trap: A $60,000 Cliff

Here is the hidden trap. For a non-resident foreign national, the estate tax exemption on their U.S.-situs assets (which includes all U.S. real estate) is a mere:

$60,000.

This isn't a typo. The exemption is over 99.5% smaller.

For that same $2 million home, the foreign national's estate is exempt for the first $60,000. The remaining $1,940,000 is exposed to U.S. estate taxes of up to 40%.

The Consequence: Your Case in Limbo

As Yiyan Cao highlighted, this tax issue creates a massive probate problem. A probate court will not release the property to the heirs until it receives an estate tax clearance from the IRS. With current backlogs, obtaining this clearance can take one to two years, or even longer. The asset is frozen, the family's inheritance is locked up, and the entire process grinds to a halt.

The Path Forward: A Coordinated Strategy

This isn't just a legal problem; it's a strategic one that requires foresight. While I'm not a tax attorney, my role as a Certified Probate Real Estate Specialist (CPRES) is to be the quarterback—to identify these high-stakes issues before they derail the process and to ensure the right experts are at the table.

As Yiyan explained, solutions exist, but they require proactive planning. Strategies often involve:

• Proper Ownership Structure (e.g., using specific corporate entities or trusts).
• Lifetime Gifting Strategies to transfer assets tax-efficiently.

The key is having a team that sees the whole picture.

Don't Let a Technicality Derail a Legacy

The rules for cross-border estates are complex and unforgiving. Having a partner who understands the landscape is not a luxury—it's a necessity. If you are an executor or attorney dealing with an estate involving foreign nationals, let's connect.