Published on and written by Cyril Jarnias
Investing in real estate across the Atlantic is attracting more and more French people. Attractive rental yields, portfolio diversification, exposure to the dollar: the arguments are plentiful. But the flip side, often underestimated, comes down to one word: taxation. Between local US property taxes, capital gains taxation, the specific mechanism of the 1031 exchange, and the interplay with the France‑U.S. tax treaty, the path for a French investor quickly resembles a maze.
Three tax levels to master: local (property taxes, transfer taxes), federal (income and capital gains), and French (via the bilateral treaty). Pitfalls to avoid: FIRPTA withholding, double taxation, errors on a 1031 exchange, forgetting IRS forms, underreporting in France.
Local U.S. Property Taxes: A Recurring Cost Not to Be Underestimated
Unlike France, where property tax remains relatively moderate, U.S. property taxes can blow a owner’s budget. A French investor is taxed at the same rates as a U.S. resident: no specific “foreign” rate.
The United States has no federal property tax: each state – and often each county or city – sets its own rate. The result is a highly contrasting tax landscape, ranging from about 0.3% of the property’s value to over 2% depending on the state.
To grasp the scale of the differences, it is useful to compare some average effective rates by state.
Comparative Overview of Property Taxes by State
The effective rate corresponds to the average annual property tax relative to the average value of owner‑occupied homes.
| State | Average Effective Tax Rate (%) | Median Home Value (USD) | Median Annual Property Tax (USD) |
|---|---|---|---|
| New Jersey | 2.23% | 395,000 | 8,809 |
| Illinois | 2.07% | 239,000 | 4,947 |
| Connecticut | 2.15–1.96% | 303–311,000 | 5,952–6,687 |
| New Hampshire | 1.86–2.09% | 316–339,000 | 5,901–7,085 |
| Texas | 1.60–1.81% | 238,000 | 3,797–3,808 |
| New York | 1.40–1.62% | 370,000 | 5,157–5,994 |
| Pennsylvania | 1.36–1.53% | 220–234,500 | 3,197–3,366 |
| Wisconsin | 1.53–1.61% | 228–230,700 | 3,535–3,671 |
| Nebraska | 1.52–1.76% | 190–205,600 | 3,059–3,131 |
| Iowa | 1.52–1.59% | 165–higher values | 2,508–up to 4,329 |
| Florida | 0.89–0.91% | 514,258 | 3,200–3,909 |
| California | ~0.75–0.75% | 991,291 | 6,864 |
| Colorado | 0.51–0.55% | 443,200–677,249 | 2,270–3,516 |
| Delaware | ~0.58–0.61% | 295,500–420,510 | 1,709–2,157 |
| Georgia | ~0.92% | — | — |
| Alabama | 0.37–0.40% | 179,200–283,125 | 658–1,052 |
| Nevada | 0.48–0.59% | 397,400 | 1,970–2,336 |
| South Carolina | 0.51–0.55% | 213,100 | 1,163–1,530 |
| Hawaii | 0.28–0.33% | 722,500 | 888–2,033 |
| Wyoming | 0.40–0.55% | 278,000 | 1,524 |
| National Average | ~0.90–0.99% | — | 4,427 |
It is immediately apparent that the location of a U.S. property weighs heavily on the net return. A $300,000 apartment in New Jersey generates about $6,000 in annual property tax at a 2% rate, compared to barely $900 in Hawaii at a 0.3% rate. Over ten years, the cash‑flow difference is colossal.
In the United States, local taxes may seem very high to a French person, who pays on average 800 to 2,500 euros per year in property tax. However, this local taxation serves as compensation for the absence or low level of other levies, such as local income tax in some states.
Beyond Property Tax: U.S. Transfer Taxes
When buying or selling, additional transfer taxes (transfer taxes, deed excise, documentary stamps) come into play, also varying greatly by state and sometimes city.
| State / City | Approximate Rate on Sale Price | Notable Features |
|---|---|---|
| Texas | 0% | No state‑level transfer tax |
| Arizona | 0% | No state transfer tax |
| Colorado | ~0.01% | Documentary fee nearly symbolic |
| Georgia | 0.1% | $1 per $1,000 |
| Ohio | 0.1% (+ county add‑ons) | Up to $3 per $1,000 locally |
| California | ~0.11% (+ city surcharges) | Los Angeles / San Francisco may add 0.5–1.5% |
| Florida | ~0.7% (up to 1.05% in Miami‑Dade) | High documentary stamp tax in some counties |
| Pennsylvania | 1% state + ~1% local | Effective rate often close to 2% |
| Delaware | 2.5% | One of the highest rates in the country |
| Washington | 1.1–3.0% (progressive) | 3% above $3M sale price |
| New York (State) | 0.4% (+ NYC surcharges) | “Mansion tax” starting at $1M |
| New Jersey | 0.4–1% | Mansion tax at 1% above $1M |
For a French investor, these entry and exit costs must be factored into projections, just like notary fees in France. Between a state like Texas with no transfer tax, and Delaware at 2.5%, the bill upon resale can change dramatically.
U.S. Real Estate Capital Gains: Federal Regime, FIRPTA, and 1031 Exchange
Once the issue of local taxes is clarified, the core question remains: how will the U.S. capital gains of a French resident be taxed, and can he use a 1031 exchange to defer this taxation?
Basic U.S. Rules on Capital Gains
At the federal level, the United States distinguishes two main categories of gains:
– Long‑term capital gains: when the property is held for more than one year. They are taxed at preferential rates of 0%, 15%, or 20% depending on the taxpayer’s overall income level.
– Short‑term capital gains: for a holding period of one year or less. They are taxed as ordinary income, with brackets ranging from about 10% to 37%.
For a nonresident alien (in the U.S. sense), such as a French person without a green card or substantial presence, the gain on U.S. real estate is considered U.S.‑source income. It is therefore taxable in the United States, even if the owner lives in Paris or Lyon.
But a crucial particularity applies to foreign sellers: the FIRPTA regime.
FIRPTA: The Withholding That Surprises Foreign Sellers
The Foreign Investment in Real Property Tax Act (FIRPTA) imposes a withholding tax on the gross sale price whenever the seller is a “foreign person” under IRS rules (nonresident individual, foreign corporation, certain non‑U.S. entities).
In practice, the buyer becomes a withholding agent:
– he must in principle withhold 15% of the total transaction amount, called the “amount realized” (price, value of any property received in exchange, and assumed debt);
– he remits this amount to the U.S. Treasury via forms 8288 and 8288‑A, within 20 days of the sale;
– the foreign seller must then file a 1040‑NR return to calculate the actual gain, compare the tax due to the amount withheld, and request a refund if applicable.
This mechanism is a deposit for the U.S. tax authorities, not a final tax. It creates a sometimes considerable cash flow strain, especially for a French investor looking to reinvest quickly or repatriate funds.
There are cases of reduction or exemption from withholding:
– if the buyer acquires the property as a principal residence and the price is less than or equal to $300,000, the withholding can be completely avoided;
– for a principal residence between $300,001 and $1,000,000, the rate may be reduced to 10%;
– a request for a withholding certificate (Form 8288‑B) can be filed before or at closing if the seller anticipates a low gain or zero gain.
But these adjustments require careful planning, buyer cooperation, and IRS processing times that can be long.
The 1031 Exchange: Deferring Capital Gains on U.S. Real Estate
For investors who wish to remain exposed to U.S. real estate, the 1031 exchange is a central tool. Provided for by Section 1031 of the Internal Revenue Code, it allows, under certain conditions, deferral of capital gains tax when selling a property held for investment or business use.
Several principles structure this regime:
Limited to real estate since 2017 (excluding personal property), the exchange defers the gain if the relinquished and replacement properties are of like kind (e.g., land for a building), held for business or investment (no personal use or short‑term flipping). To defer the entire gain, the acquisition price must be at least equal to the sale price and 100% of the proceeds reinvested, with no cash withdrawal or debt reduction (avoiding taxable “boot”).
Two strict deadlines govern the transaction:
– 45 days from the sale to identify in writing one or more potential replacement properties;
– 180 days maximum to complete the acquisition of the replacement property (or, if earlier, the due date of the tax return for the year of sale).
Finally, the 1031 exchange must be executed with the help of a qualified intermediary (QI), an independent intermediary who receives the sale proceeds, holds them, and reinvests them in the replacement property. The seller must never take possession of the funds, even temporarily, or the exchange will be disqualified.
A Mechanism Available to French Investors, but Strictly “Domestic”
The good news for French residents is that Section 1031 is not limited to U.S. citizens. Any taxpayer subject to U.S. federal income tax – including a nonresident alien – can, in principle, use it, provided they comply with the rules.
For a nonresident French investor, two major limitations apply:
In a U.S. 1031 exchange, the real estate properties must be located within the United States. A property located abroad (e.g., France, Switzerland) is not considered like kind, which prevents it from being included in a 1031 exchange. This rule is symmetrical: two properties both located outside the United States may qualify for an equivalent local regime, but not for the U.S. 1031.
2. Double constraint for nonresidents For a nonresident alien using a 1031 exchange on a U.S. property, the replacement property must also be located in the United States. Similarly, if the investor holds properties exclusively abroad, any use of a “1031‑type” regime must be done within that foreign framework, without mixing U.S. and foreign properties.
For a French person who owns an income‑producing building in New York and wishes to reposition into a rental property in Austin, the 1031 exchange remains an option, subject to meeting the deadlines, using a qualified intermediary, and respecting the full reinvestment requirement.
1031 Exchange and FIRPTA: A Delicate but Feasible Coordination
When a seller is foreign, FIRPTA generally applies even if the transaction is part of a 1031 exchange. However, there is a FIRPTA withholding exemption in a very specific case:
– the sale of the relinquished property and the purchase of the replacement property occur simultaneously, in a single closing;
– the exchange involves no payment of cash or other noneligible property (complete absence of “boot”);
– the seller notifies the buyer that the gain is not recognized for tax purposes under Section 1031;
– the buyer transmits a copy of this non‑recognition notice to the IRS within 20 days.
Suffice it to say that this situation requires meticulous preparation, as the slightest timing lag or any cash withdrawn from the transaction would cause the exemption to fall, reactivating the 15% FIRPTA withholding.
For a French investor, this means that a 1031 exchange can, in well‑structured cases, avoid both immediate tax and FIRPTA withholding, but at the cost of flawless structuring.
How the France–U.S. Tax Treaty Treats Real Estate Income and Capital Gains
Beyond the purely U.S. mechanics, a French tax resident is also liable for tax in France. This is where the Tax Treaty between France and the United States comes into play, one of whose fundamental objectives is to avoid double taxation.
The Basic Principle: Real Estate Is Taxed Where It Is Located
The treaty enshrines a classic principle of international tax law: income and gains from real property are taxable in the state where the property is situated. For an apartment rented in Boston or a building in Houston, the United States therefore has the primary right to tax the rents and capital gains upon resale.
This does not mean that France gives up taxing its resident entirely. Regarding capital gains, the article on gains from the alienation of property allows the country of residence of the owner (France for a French resident) the possibility of also taxing the gain, after the country where the property is located.
The treaty then organizes a tax credit mechanism to prevent the same gain from being fully taxed twice.
The French Tax Credit on a U.S. Real Estate Capital Gain
For a French resident who sells a U.S. property, the theoretical sequence is as follows:
The total tax rate in France on a capital gain from real estate other than a principal residence, including 19% income tax and 17.2% social contributions, before applying holding period allowances.
In most cases, especially for medium to long holding periods, the combination of U.S. tax and French tax capped by this credit effectively avoids full double taxation, although when the U.S. rate is lower than the French rate, an additional tax may remain payable in France.
Treatment of U.S. Rental Income for a French Resident
Rental income from a property located in the United States follows the same basic logic: it is taxable in the country where the property is situated, but also in the country of residence.
In the United States, a French investor may choose to treat his rental income:
– either as passive income subject to a 30% withholding on gross (unless reduced by treaty);
– or as effectively connected income (ECI) by electing this classification. This election allows him to deduct expenses (mortgage interest, property taxes, repairs, depreciation) and be taxed at progressive rates on the net result.
Amounts taxed in the United States must be reported in France as foreign‑source rental income or business profits. France calculates the tax according to its own rules, then grants a tax credit equal to the U.S. tax paid, within the limits of the tax treaty.
Here again, the objective is not to fully exempt the investor, but to prevent him from paying the full tax on the same income twice.
Special Status of U.S. Citizens Residing in France
The treaty provides a specific regime for U.S. citizens who are tax residents of France, who remain subject to U.S. taxation on their worldwide income, including on French real estate capital gains. In certain specific cases (dividends, interest, stock capital gains, etc.), France grants these individuals a tax credit equal to the French tax, rather than the U.S. tax, which effectively neutralizes French taxation on those flows.
For U.S. real estate held by such a Franco‑American resident, the mechanism remains based on primary taxation in the United States, with cross‑crediting via the Foreign Tax Credit (Form 1116) on the U.S. side and the treaty tax credit on the French side.
The 1031 Exchange Seen from France: Defer in the U.S., Report in France
One of the points that most intrigues French investors is the impact of a 1031 exchange on their French tax situation. Does deferring the gain in the United States also mean deferring the tax in France? The answer is nuanced.
Non‑Recognition in the U.S., but Autonomous French Treatment
From a U.S. perspective, a properly structured 1031 exchange results in non‑recognition of the gain: the tax basis of the replacement property essentially carries over from the relinquished property, adjusted, and the unrealized gain is not taxed as long as the mechanism continues.
From a French perspective, the general rule is that capital gains on real estate are taxable in France as soon as a French resident sells a property, even if that property is located abroad. The treaty grants him a credit for tax paid in the country where the property is situated, but does not make French taxation dependent on the U.S. classification.
Even if the United States defers taxation through a 1031 exchange (no immediate tax), France considers that the French resident has realized a taxable gain as soon as the U.S. property is sold, regardless of the absence of local tax.
In such a case, the French tax credit would be zero, since no tax was paid in the United States on that sale. The French resident could therefore end up paying tax in France on a gain that the United States has agreed to defer.
In practice, structuring a 1031 exchange for a French resident must therefore be analyzed on a case‑by‑case basis, weighing:
– the value of the 1031 exchange for U.S. planning (tax deferral, U.S. wealth management, future heirs, etc.);
– the triggering effect on French taxation, which may impose the gain independently.
The Critical Role of Holding Period Under French Law
Another essential parameter is the holding period of the property from a French perspective. Even if, in the United States, a chain of 1031 exchanges allows indefinite deferral of the gain, France applies its allowances based on the holding period of the sold property.
After 22 years of holding, the 19% capital gains tax is eliminated, and after 30 years, the 17.2% social contributions disappear. A French investor can thus achieve full exemption in France, even if the gain is deferred via a 1031 exchange.
In other words, the holding timeline becomes a planning tool in its own right: waiting for the right thresholds to sell or exchange an asset can make the difference between residual taxation in France and complete neutralization through the allowances.
Practical Cases: Where Does Optimization Really Take Place for a French Investor?
To understand the interplay between local U.S. tax, 1031 exchange, and tax treaty, it is useful to reason with typical situations.
Case 1: The Pure Rental Investor Who Stays in the U.S.
A French resident buys an income‑producing property in a high‑property‑tax state, for example New Jersey. His rents are taxed in the United States, either at 30% on the gross or as ECI with expense deductions. He then reports this income in France, where it is added to his global income, with a tax credit for the tax paid in the United States.
The high local taxes reduce cash flow, but also, indirectly, the U.S. taxable base if he is under the ECI regime. From France’s perspective, the property taxes are deductible expenses in determining the net rental result.
Upon resale after ten years with a gain, the seller incurs FIRPTA withholding, reconciled via the 1040‑NR return, and pays federal tax on the long‑term capital gain. In France, the gain is calculated under the nonresident regime with allowances for ten years of holding, and a tax credit is granted for the U.S. tax already paid.
If instead he chooses to do a 1031 exchange into another U.S. property, he defers the U.S. tax but exposes himself to immediate French taxation if he is a French tax resident. The trade‑off will be between U.S. wealth planning goals (U.S. transmission, eventual exit, possibility of multiple exchanges) and the immediate cost in France.
Case 2: The French Investor Who Wants to Repatriate Capital to France
In this second scenario, the French investor wishes to “exit” U.S. real estate definitively to reinvest in Europe. The 1031 exchange is of no help here, because it does not allow swapping a U.S. property for a French property. The sale triggers:
Key steps to manage tax obligations upon sale
A FIRPTA withholding is applied to the sale price
A calculation of U.S. tax on the gain is required, via the 1040‑NR return
The gain must be reported in France, benefiting from holding period allowances and a credit for U.S. tax
To prepare for this exit, the room for maneuver lies more in:
– the choice of state where the property is located, to manage the local tax (property tax) and transfer taxes;
– the holding period, to maximize French allowances (up to full exemption after 22 and 30 years);
– timing management between the sale date and any change of tax residence, especially for those considering leaving France or returning.
Even without a 1031 exchange, well‑executed multi‑year planning can drastically reduce the overall tax bill.
U.S. Local Property Tax vs. French Taxe Foncière: Opposing Philosophies
For a French person used to the tax system in France, the main surprise regarding U.S. real estate taxation lies in the central role of property tax in funding local governments. While in France, the taxe foncière averages from a few hundred to a few thousand euros per year, states like New Jersey, Illinois, or Connecticut show annual bills that can exceed $8,000 for a “standard” home.
Certain U.S. states like Hawaii, Alabama, or Colorado have effective property tax rates below 0.5%.
| Country / Area | Primary Calculation Basis | Approximate Average Burden |
|---|---|---|
| France – taxe foncière | Cadastral rental value × local rates | ~0.3% of market value on average (variable) |
| United States – property tax | Market value × state/local rates | ~0.9–1% on average, with extremes from 0.3% to >2% |
This difference in philosophy is reflected in the overall structure: the United States favors high property taxes but sometimes low or no state income tax, while France combines national income tax, local taxes, and, for high net worth, the real estate wealth tax (IFI).
For a French investor, this means that the “advantage” of an attractive U.S. real estate market can be largely offset by very heavy local taxation in some areas, while other states constitute veritable “niches” in terms of property tax.
IFI and Holding U.S. Real Estate by a French Resident
Even though the research report mainly details the IFI mechanism for French real estate, one essential point emerges: France taxes under IFI the net value of the entire worldwide real estate portfolio of residents whose wealth exceeds 1.3 million euros.
For a French resident owning a mixed France‑U.S. real estate portfolio, U.S. properties are included in the IFI base after deducting associated debts (mortgages, loans). Thus, financing a U.S. purchase with debt rather than equity can delay or even neutralize entry into the IFI scope.
In practice, some French investors deliberately choose to borrow for their U.S. acquisitions, in order to reduce the net value of their real estate portfolio for IFI purposes, even though this strategy must be weighed on a case‑by‑case basis depending on the cost of credit, expected return, and the household’s overall situation.
Why Cross‑Border Planning Is Essential
This overview shows that U.S. real estate taxation for a French resident cannot be reduced to the 1031 exchange alone, nor to the tax treaty alone, nor to local taxes alone. It is the interplay of all elements that yields the final result.
Some constants nevertheless emerge:
U.S. local taxes are often higher than in France and vary by state. FIRPTA burdens foreign sales, but strategies (withholding certificate, principal residence, 1031 exchange) can limit its impact. The 1031 exchange defers U.S. federal tax but only applies to the U.S. market and does not affect French taxation. The France‑U.S. tax treaty avoids double taxation via tax credits, without exempting capital gains or property income. Finally, the holding period is crucial for a French resident thanks to allowances after 6, 22, and 30 years.
Investing in U.S. real estate as a French person therefore requires accepting two realities: the U.S. tax environment is both opportunistic (1031, choice of rental income status, wide range of local rates) and formidable (FIRPTA, high property taxes, worldwide taxation for Americans), and France is never far behind, ready to apply its own rules to any tax resident. Between the two, the tax treaty acts as an essential framework, but not as an absolute shield.
For an informed investor, taxation is not an obstacle but a complex playing field that allows building a coherent transatlantic real estate strategy. This involves careful selection of states, prudent use of the 1031 exchange, mastery of FIRPTA, and integration of French rules (IFI and long‑term capital gains), provided that taxation is treated as a structuring parameter from the outset.
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Cyril Jarnias is an independent expert in international wealth management with over 20 years of experience. As an expatriate himself, he is dedicated to helping individuals and business leaders build, protect, and pass on their wealth with complete peace of mind.
On his website, cyriljarnias.com, he shares his expertise on international real estate, offshore company formation, and expatriation.
Thanks to his expertise, he offers sound advice to optimize his clients' wealth management. Cyril Jarnias is also recognized for his appearances in many prestigious media outlets such as BFM Business, les Français de l’étranger, Le Figaro, Les Echos, and Mieux vivre votre argent, where he shares his knowledge and know-how in wealth management.
