Own or Lend: Why Lending Wins for a Foreign Investor
Most foreign investors who want US real estate returns assume the only way in is to buy the property. Buying is the expensive door. Own a US rental as a non-resident and the US taxes the rent every year, on a US tax return you now have to file. Sell, and 15% of the gross sale price (not the profit, the whole price) is withheld at the closing table under FIRPTA. Die holding it, and the US taxes everything over a bare $60,000 at rates that reach about 40%, with no US-Israel estate treaty to soften the blow. Our guides to FIRPTA withholding and US estate tax for non-resident aliens walk through each of those exposures in detail.
Now lend against the same property instead. You hold a first-lien mortgage note at a fixed rate, and the borrower (often the developer or an investor group) owns the building and its headaches. Structured correctly under current law, the interest reaches you free of US income tax, repayment of your principal is not a gain event, the note is not a US asset for estate tax purposes, and your entire US paperwork is one Form W-8BEN handed to the borrower. That is the portfolio interest exemption, and it is why "lend, don't own" is often the cleaner way for a foreign family to earn US real estate returns.
| Event | Own the property | Lend against it |
|---|---|---|
| Yearly income | US income tax on the rent, filed on a yearly US return | Interest at 0% US tax, structured correctly under current law |
| Sale or payoff | 15% of the gross sale price withheld at closing (FIRPTA), plus tax on the gain | Repayment of principal is not a gain event; nothing withheld |
| At your death | US estate tax of about 40% over a $60,000 exemption; no US-Israel estate treaty | A qualifying note is not a US asset for estate tax |
| US paperwork | A yearly US income tax return, plus more if you own through an LLC | A Form W-8BEN to the borrower; the borrower files the yearly report |
| Your position | Owner: vacancies, repairs, liability, and market risk | First-lien lender, secured by the property |
The rest of this page is the discipline that keeps you on the right side of that table.
The Four Requirements, Every Loan
The exemption is not automatic. It attaches only when the loan meets four requirements, and every one of them is a documented way real deals fail. Each is a drafting decision, not luck:
- The note must be in registered form. That means a named holder, transferable only by surrender and reissue or by book entry, never a bearer note payable to whoever holds the paper. A bearer note cannot qualify, no matter what other paperwork exists.
- You must own less than 10% of the borrower. The count is wider than your own name: family members and related entities are added to your total under US attribution rules, and for an LLC borrower the test is 10% of capital or profits, not votes. A conversion right is counted as if exercised. We screen the borrower's cap table and your family's holdings before the loan closes.
- The coupon must be non-contingent. A fixed rate is fine. A rate tied to a published index like SOFR or prime is fine. Any link to the borrower's profits, receipts, distributions, or the value of the property is not, and it poisons the exemption. This trap deserves its own section below.
- A valid Form W-8BEN must be in the borrower's hands before the first interest payment. Without it the borrower must withhold 30% of every payment, and the borrower is personally liable for that tax if it pays you in full anyway.
One reassurance worth having in writing: US law does carve banks making ordinary-course loans out of the exemption, but that carve-out is bank-only. It does not reach you as an individual private lender, and no one should scare you out of the structure with it.
The Estate Tax Win: The Note Sits Outside Your US Estate
The income side gets the attention, but for many families the estate side is the bigger prize. If the interest on your note qualifies for the exemption, the note is not treated as a US asset at your death at all. The $60,000 exemption and the 40% rate that make US property so dangerous for a foreign owner never come into play, and under current law the test looks at whether the interest would have qualified at the moment of death, so the shelter does not even depend on a form being on file that day. For a lender from a country with no US estate treaty, Israel among them, that is the difference between passing the full note to your family and losing a large slice of it to a tax that ownership would have triggered.
There is one carve-back, and it teaches the same lesson as everything else on this page: if the interest is contingent (tied to profits or appreciation), a proportionate slice of the principal is pulled back into the US estate. A participating loan is income-taxed and estate-taxed at once. Keep the coupon fixed and non-participating and the note stays out. The wider picture of what a foreign person's estate touches in the US lives in our international estate planning guide and our page on estate planning for non-US citizens.
The Participation Trap: No Equity Kicker, No Profit Share
Here is the bright line that governs every one of these loans. A lender who holds the note solely as a creditor (fixed or index-tied interest, principal back, nothing more) is safe. A lender with any direct or indirect right to share in the property's appreciation, its sale proceeds, or its profits is not solely a creditor in the eyes of US tax law, and the entire note becomes a US real property interest. Not the kicker portion. The whole instrument. There is no de minimis and no partial credit: a 1% slice of the upside taints 100% of the note.
That one change collapses all four protections at once. The interest becomes contingent, so the 0% is gone. FIRPTA attaches to the note itself. The estate shelter is lost, and a slice of principal moves back into the US estate. And the treaty fallback is weak: for an individual lender the US-Israel treaty generally allows 17.5% withholding on interest, and for participating interest the treaty is old enough that it may not cap the tax at all. Equity kickers, profit shares, shared-appreciation mortgages, convertible rights, and quiet side deals with the owners all land in the same place, because the US taxes the substance of the deal, not the label on the paper.
If you genuinely want a share of the upside, the honest answer is to own it: take a real equity stake through a properly structured company built for a foreign owner, and accept the tax posture that comes with ownership. That is separate, co-counseled work, and it beats dressing equity up as debt and having the IRS undress it later.
Financing a US property or business from abroad?
A free 30-minute consult maps whether your loan can qualify, what recording will cost in Florida, and how to keep the note outside your US estate, before anything is signed.
Book your free consultFlorida Mechanics: Recording, Usury, and Licensing
A Florida mortgage loan has a price of admission, and it belongs in your budget rather than in a closing-day surprise. On a $1,000,000 loan the recording taxes run about $5,500: documentary stamps of $0.35 per $100 on the note, which are uncapped when the note is secured by a Florida mortgage, plus an intangible tax of $2 per $1,000 on the mortgage itself. Do not be tempted to leave the mortgage unrecorded to save the tax. Recording is what protects your lien priority against later creditors and buyers, and the security is the reason lending beats owning in the first place.
Florida also regulates the rate and the lender. The usury ceiling is 18% all-in on loans of $500,000 or less, and points and fees count toward the rate, so an aggressively priced smaller loan can cross the line without meaning to. On licensing, the pattern that keeps a private lender outside Florida's mortgage-lender licensing and the federal consumer-mortgage rules is the one we structure: you lend your own money, for your own investment, not held out to the public, as a business-purpose loan to an LLC borrower. Never finance a consumer buying the home they will live in; that is a different regulatory world. And if you have read about Florida's restrictions on foreign buyers of real estate, they do not reach this structure: Israel is not on the restricted list, and that law targets ownership, not liens.
Stay a Lender, Not a Lending Business
The exemption protects an investor, not a lending operation. A handful of passive loans, made with your own money and held to maturity, is investment, and the 0% holds. Regular, continuous loan origination is something else: soliciting borrowers, underwriting, and closing as a business, especially through a US-based agent whose activity is attributed to you, can make you a US trade or business under US tax rules. Then the interest is taxed as US business income at full graduated rates, on a US return, and the exemption is gone by definition. The line is drawn on facts, not labels, and it moves with volume. If your lending is growing into something fund-like, that is a different posture with its own planning, and we bring in international tax co-counsel before you get there rather than after.
The Borrower's Side: Withholding, Form 1042-S, and Default
If you are the US borrower or developer, this page is about your liability too. The borrower is the withholding agent. That means you collect the lender's Form W-8BEN before the first interest payment, and you file Form 1042-S every year reporting the interest, even at a 0% rate, because exempt is not the same as unreported. If the form is not in hand, you must withhold 30% of every payment, and if you pay the lender in full anyway, the tax comes out of your pocket, personally, with interest and penalties on top. A one-page form collected on day one is the cheapest insurance in the deal.
Default planning belongs in the loan documents from the start. If the lender forecloses and takes title in their own name, the structure runs in reverse: the foreign lender becomes a foreign owner of US real estate, with the estate exposure and FIRPTA posture the loan was built to avoid. The documents should route title on default to a pre-built blocker entity instead, so the property never lands in the individual lender's name even when the deal goes bad.
The Israeli Side: What We Flag and Refer
Nothing on this page is Israeli tax advice, and this section exists to flag, not to conclude. Israel taxes its residents on worldwide income, so the interest the US taxes at 0% is generally taxed in Israel, commonly at 25% for a foreign-currency note, with surtaxes at high incomes. A new oleh, or a qualifying returning resident, can have a 10-year window in which the interest is tax-free in both countries at once, which makes the structure unusually attractive in those years. There are self-inflicted wounds to avoid on the Israeli side too: lending to a company you own 10% or more of, borrowing to fund the loan, or running the lending as a business can push the Israeli rate up sharply. Every one of those conclusions belongs to Israeli counsel, ideally confirmed with a pre-ruling from the Israeli tax authority. We issue-spot, we coordinate, and we refer.
How We Structure It, and What We Refer Out
Our side of the engagement is the structure. We draft the registered note and the mortgage, run the four-requirement screen against the borrower's cap table and your family's holdings, handle the Florida recording and usury mechanics, build the take-title blocker into the loan documents, and deliver the estate-side opinion that the note sits outside your US estate, all quoted as a flat fee up front (our pricing page explains how we quote). Three pieces go out by design: where a growing loan book crosses into a US lending business, how a treaty would characterize any upside feature, and any restructuring of an existing participating loan are co-counseled with an international tax advisor, and everything on the Israeli side goes to Israeli counsel with a pre-ruling where it matters. The structure pairs naturally with the rest of a cross-border plan, and the umbrella view lives in our international tax planning guide.
Frequently Asked Questions
What Is the Portfolio Interest Exemption?
US law normally taxes a foreign person's US-source interest at 30%, withheld by the payer before the money leaves. The portfolio interest exemption drops that to 0% for a qualifying private loan: the note must be in registered form (a named holder, transferable only by surrender and reissue), the lender must own less than 10% of the borrower counting family and related entities, the coupon must not be tied to the borrower's profits or the property's value, and the borrower must hold the lender's Form W-8BEN before the first payment. It exists to let foreign capital lend into the US, and it is the backbone of the "lend, don't own" structure for foreign investors in US real estate.
Can I Add an Equity Kicker or Profit Share to the Loan?
No, not without losing everything the structure protects. Any direct or indirect right to share in the property's appreciation, sale proceeds, or profits makes the interest contingent, so the 0% is gone, and it makes the entire note a US real property interest, so FIRPTA attaches and the estate shelter is lost. There is no de minimis: a 1% kicker taints 100% of the note, and a quiet side deal with the owners counts the same as a clause in the note. If you genuinely want upside, own an equity stake honestly through a properly structured company instead. That is separate, co-counseled work.
Does the Loan Trigger FIRPTA?
A clean fixed-rate or index-tied mortgage does not. FIRPTA reaches US real property interests, and a lender holding a note solely as a creditor does not own one; the borrower owns the property. Repayment of principal is not a gain event and nothing is withheld when the loan pays off. The line moves the moment the loan shares in the property's upside: then the whole note becomes a US real property interest, and FIRPTA follows it. Keeping the coupon fixed or tied to a published index is what keeps FIRPTA out of the deal.
What Happens If I Die Holding the Mortgage?
If the interest qualifies for the exemption, the note is not treated as a US asset at your death, so it sits outside the US estate tax entirely: no 40% rate and no $60,000 cliff, even though there is no US-Israel estate treaty. Under current law the test looks at whether the interest would have qualified at the moment of death, so the shelter does not depend on a form being on file that day. The one carve-back: if the interest was contingent (a profit or appreciation link), a proportionate slice of the principal is pulled back into the US estate. Keep the coupon fixed and the note stays out.
Do I Need to File a US Tax Return on the Interest?
Structured correctly, no. You give the borrower a Form W-8BEN before the first interest payment, and the borrower reports the interest each year on Form 1042-S at a 0% rate. You file no US income tax return on the interest, and repayment of your principal is not a taxable event. One caution: if you lend through a US single-member LLC instead of your own name, that entity adds its own annual information filing (Form 5472 with a pro-forma return) carrying a $25,000 penalty per missed form, which is one reason most private lenders lend directly.
What Does It Cost to Record a Mortgage in Florida?
On a $1,000,000 loan, budget about $5,500. Florida charges documentary stamp tax of $0.35 per $100 on the note, with no cap when the note is secured by a Florida mortgage, plus an intangible tax of $2 per $1,000 on the mortgage itself. The tax is due when the mortgage is recorded, and recording is what protects your lien priority against later creditors and buyers, so skipping it to save the tax would trade away the security that makes lending safer than owning.
Can I Lend to a Company I Partly Own?
Only if you stay under 10%, and the count is wider than your own name. US attribution rules add your family members and related entities to your total, for an LLC borrower the test is 10% of capital or profits rather than votes, and a conversion right is counted as if exercised. Crossing the line kills the exemption on the entire coupon. The Israeli side has its own version of the same trap: lending to a company you own 10% or more of can raise your Israeli rate sharply, a question for Israeli counsel. We screen the cap table before the loan closes.
What If the Borrower Defaults?
Plan for it in the loan documents, not at the courthouse. If you foreclose and take title in your own name, the structure runs in reverse: you become a foreign owner of US real estate, with the estate exposure and FIRPTA posture the loan was built to avoid. The documents should route title on default to a pre-built blocker entity instead, so the property never lands in your personal name even when the deal goes bad. Building that entity before the loan closes costs little; building it during a default is much harder.
Common Situations
The Tel Aviv investor choosing between a condo and a note. A family in Tel Aviv has $1,000,000 to place in Miami real estate. Buying a rental means a yearly US tax return, FIRPTA withholding at sale, and a 40% estate exposure over $60,000. Instead they lend the money to the developer at a fixed rate, secured by a first-lien recorded mortgage, with a registered note and a W-8BEN delivered at closing. The interest arrives free of US tax, the note sits outside the US estate, and their entire US filing burden is zero.
The lender offered "2% plus 20% of the upside." A borrower sweetens a below-market coupon with a fifth of the project's profit. That one clause would make the whole note a US real property interest: the interest becomes contingent and loses the 0%, FIRPTA attaches, and a slice of the principal moves into the US estate. The deal is restructured into a clean fixed-rate note at a higher coupon, and the client is walked through what honest equity ownership would look like instead, as a separate co-counseled structure.
The developer who never collected a W-8BEN. A Florida borrower paid two years of interest to its foreign lender with no form on file and no withholding. The borrower, not the lender, is personally on the hook for the 30% that should have been withheld, plus interest and penalties. The fix is collecting the W-8BEN now, correcting the Form 1042-S filings with the company's tax preparer, and calendaring the form's expiration so it never lapses again.
Sources of Law
- The portfolio interest exemption: 26 U.S.C. §871(h) (registered form; the 10% shareholder bar with §318 attribution; contingent interest; the W-8BEN statement) and §881(c) (corporate lenders; the bank-only carve-out). law.cornell.edu
- The estate-tax exclusion and its carve-back: 26 U.S.C. §2105(b)(3) (qualifying portfolio debt is not US-situs property) and the §2105(b) flush language (a contingent-interest failure pulls an appropriate portion of the debt back into the US estate). law.cornell.edu
- The "solely as a creditor" line: 26 U.S.C. §897 and Treas. Reg. §1.897-1(d) (any direct or indirect right to share in appreciation, proceeds, or profits makes the obligation, in its entirety, a US real property interest); IRM 4.61.12 (shared-appreciation loans). law.cornell.edu
- The lending-business (ECI) line: 26 U.S.C. §864(b). Treaty fallback: US-Israel Income Tax Treaty, Art. 13 (interest; generally 17.5% for an individual lender) and Art. 15 (income from real property). irs.gov
- Florida mechanics: Fla. Stat. §201.08 (documentary stamp tax, uncapped on a note secured by a Florida mortgage); §199.133 (nonrecurring intangible tax, 2 mills); §§687.03 and 687.071 (usury); §494.00115 (licensing exemptions); §692.201 (foreign-ownership restrictions; Israel is not a listed country). flsenate.gov
- Reporting: IRS Forms W-8BEN, 1042-S, and 5472 and their instructions. irs.gov (retrieved 2026-07-16)
Updated on July 16, 2026. Reviewed by Kevin D. Klagge, Esq., Fla. Bar No. 99502. Attorney Kevin Klagge represents families, businesses, and international clients in estate planning and international law, with a focus on Florida legal tools. He litigates estate and business issues in court. This article is general information about US and Florida law, not legal or tax advice, and does not create an attorney-client relationship. Cross-border lending is coordinated work: the firm structures the note, mortgage, and estate side, the US trade-or-business line and treaty questions are co-counseled with an international tax advisor, and Israeli tax is handled by Israeli counsel. Figures are per current federal and Florida rules and may change. Your result depends on your specific facts.