U.S. Real Estate: These Mistakes That Destroy a European Investor’s Profitability

Published on June 11, 2026 and written by Cyril Jarnias

Embarking on real estate in the United States is a dream for many Europeans: a vast market, property rights accessible to foreigners, deep rental demand, diverse assets… On paper, everything seems aligned to build a solid dollar-denominated portfolio. But behind this facade lies a legal, tax, and operational environment radically different from that of major European countries.

This article breaks down, based on available data and studies, the major mistakes that destroy profitability for a European investor in U.S. real estate, and explains how to avoid them concretely.

Ignoring U.S. Taxation for Non-Residents

Many Europeans assume that since they are neither citizens nor tax residents of the United States, they will only be taxed in their home country. This is a fundamental error. The U.S. system applies a very clear logic: income and capital gains related to real estate located on U.S. soil are, by default, taxed in the United States, even for a non-resident.

The 30% Time Bomb on Rental Income

For a non-resident renting out a property in the United States, the default regime is brutal: 30% withholding tax on the gross rental amount, with no deduction for expenses. In other words, if your tenant or property manager pays you $3,000 per month, $900 would go directly to the U.S. tax authorities.

However, U.S. law offers an escape: a non-resident can elect to be taxed on net income (after deducting expenses) by making a specific election (Section 871(d)) and filing a Form 1040NR each year. This election requires obtaining a U.S. tax identification number (ITIN), keeping records of expenses and depreciation, and staying current with filing obligations.

Failing to take this step, either out of ignorance or fear of complexity, means accepting a 30% tax on your gross rents, often for nothing. This is one of the most profitability-destroying mistakes.

FIRPTA: The Automatic Discount at Sale

Another shock for European investors: selling. The U.S. FIRPTA (Foreign Investment in Real Property Tax Act) treats the sale of real estate by a foreigner as income “effectively connected with a U.S. trade or business” and imposes withholding on the gross sales price, not just the gain.

Approaching the U.S. market without incorporating this reality into your IRR projections is a strategic mistake. FIRPTA withholding is not, in itself, an additional tax—it’s a deposit. But it has a direct effect on cash flow at exit and on the net price actually received. Moreover, many foreign sellers discover too late that they must file a detailed return to recover any overpayment. Without advice, some forfeit part of the money owed to them.

Capital Gains Tax: Closer to U.S. Rules Than European Habits

In essence, U.S. real estate capital gains follow a logic similar to what domestic investors know: a distinction between short-term gains (holding period ≤ 1 year, taxed as ordinary income) and long-term gains (holding period > 1 year, with lower rates of 0%, 15%, or 20% depending on income level).

For a foreigner, the big mistake is twofold

Unspecified person

– selling too early, and getting taxed at the ordinary income rate, which is much higher;

– not reconstructing an accurate “cost basis” (purchase price, closing costs, improvements, depreciation already taken) that reduces the taxable gain.

Undocumented improvements, forgotten costs, and poorly tracked depreciation translate into higher taxes than necessary. Across a portfolio, this lack of documentation discipline destroys several IRR points, when treating these files with the same seriousness as an institutional investor would suffice.

Underestimating the Impact of Estate Tax on U.S. Real Estate Assets

One of the most overlooked traps for Europeans is U.S. estate taxation on assets located in the United States, particularly real estate. While a U.S. citizen benefits from an exemption of several million dollars, a non-resident, absent a specific treaty, is only entitled to an exemption of… $60,000 on the total value of their U.S. assets (real estate, U.S. stocks, etc.).

Many investors structure their acquisitions directly, or through an inappropriate U.S. structure, without realizing they are placing a “U.S. situs” asset at the heart of their international estate. Not only can long-term profitability be severely impacted, but the liquidity of the transfer (settlement time, costs, need to sell to pay the tax) is also compromised.

Estate planning—choice of structure (foreign corporation, interposed vehicle, etc.), possible use of a tax treaty, alignment with the inheritance laws of the home country—is not a luxury: it is a central element of net profitability over a generational horizon. Pretending to ignore the issue effectively means accepting that the U.S. tax authorities become co-heirs to your portfolio.

Neglecting the Ownership Structure: The “All Direct” Obsession

In many European countries, buying property directly in the name of the individual remains common practice, sometimes tax-neutral, sometimes even optimal (especially when rental income is moderate and long-term capital gains are favorably taxed). Some transplant this approach without adaptation to U.S. real estate.

However, for a non-resident investor, direct ownership presents several major drawbacks:

Conversely, ownership through a well-structured foreign company can, in some cases, limit U.S. estate exposure, even if income flows remain taxable at source. Ignoring this dimension and being convinced that buying “in your own name” is simpler is trading apparent administrative simplicity for massive wealth risk.

Focusing on the Purchase Price While Forgetting U.S. Ancillary Costs and Management Fees

Europeans often model their investments by including 8% to 15% in acquisition fees and taxes (depending on the country: transfer taxes, notary, registration, etc.), then 1% to 2% in annual costs (property tax, utilities, insurance). They project these ranges onto U.S. real estate, sometimes thinking that transaction costs are lower there.

The reality is different: while some closing costs are indeed more contained than in Europe, the “scissor effect” mainly comes from recurring management costs, insurance, and local property taxes.

Property Tax and Management Fees: Percentages That Eat Into Margins

In the United States, all property owners—residents and non-residents alike—must pay annual property taxes that can be very high depending on the state and city. At the same time, day-to-day management is rarely handled directly by a European investor: a property manager must be hired.

– typically charges between 8% and 12% of collected rents for ongoing management;

– additionally charges reletting fees, often equivalent to 50% to 100% of one month’s rent when placing a new tenant;

– often applies a markup on maintenance work (10% to 20%, sometimes more).

The combination of property tax + management fees + maintenance can absorb a significant portion of gross income. Adding insurance, HOA or condo fees, bank charges, and various local taxes, the net margin quickly shrinks, especially for properties with a low initial yield.

The typical mistake of the European individual is to build a business plan using only a 10% management fee and summary expenses, without modeling the entire cost structure. In the end, they discover that the net pre-tax return is two to three points below forecasts.

Comparative Tables: Typical Management and Operating Costs

It is useful to establish realistic ranges. The ranges below, based on industry data, give an idea of the share of gross revenue that can go toward operating costs for a rental/short-term rental property in a developed environment like the United States.

For a standard residential rental managed by a property manager, the cost structure, even if different from a short-term rental, remains in the same order of magnitude in terms of friction on income. Building your model using “French-style” expenses in a U.S. expense environment is a calibration error that costs you every month of rent.

Poorly Managing the Dollar/Euro Currency Risk

Studies on international real estate show that currency fluctuations can, depending on periods and markets, either boost profitability or completely crush it when converting back to the original currency.

For a European investor exposed to the dollar, several mechanisms are at play:

– if the dollar strengthens against the euro between purchase and sale, the performance in euros is mechanically amplified;

– if the dollar weakens, local real estate gains can be largely neutralized, or even turned into a loss in European currency.

For the United States in particular, the recent context—strong dollar, high hedging costs for some currencies like the yen—has led many foreign investors to reduce or adjust their hedging strategies. Japanese institutions investing in U.S. real estate have thus found that the cost of currency hedging (up to 500 basis points) simply wiped out the current yield (~4%) of the underlying assets.

The European investor therefore makes two symmetrical mistakes:

More refined approaches, widely documented in financial literature, rely on partial hedging strategies (e.g., 50–60% of currency risk permanently hedged, the rest managed opportunistically) or “natural hedging” (local dollar financing when rents are in dollars).

The challenge for a European is not to eliminate currency risk—which can be costly—but to quantify it, manage it in line with their investment horizon and tolerance for volatility.

Getting Financing Wrong: Expecting a U.S. Loan Like in Europe

Legally, nothing prevents a foreigner from buying real estate in the United States. Many statistics even show that non-citizens purchase tens of thousands of homes each year for several tens of billions of dollars. But the freedom to buy does not mean easy access to credit.

U.S. banks treat a foreign investor as a higher-risk profile, due to:

The consequences are clear:

– for a rental purchase, the simplest path is often paying cash;

– when financing is possible, the required down payment is generally 30% to 40%, sometimes up to 50%;

– rates offered to non-residents are higher than those for standard U.S. borrowers;

– approval processes are longer and more demanding in terms of documentation (income, assets, residency status, etc.).

The corollary is this: if you have to pay cash or with a large down payment, your return on equity depends much more on the intrinsic quality of the asset, NOI growth, and your tax discipline than on generous leverage. The illusion that “U.S. credit will do the work” is one of the most dangerous for a European accustomed to relatively accessible domestic financing.

Importing European Legal Reflexes Without Understanding U.S. Landlord-Tenant Law

Many European landlords are used to an environment that is extremely protective of tenants: rent control, strict eviction constraints, heavy obligations for the landlord. They then project themselves into the United States imagining they will benefit from a much more favorable regime, where “everything is for the landlord.”

A Different Balance, But Not an Absence of Protections

U.S. law has progressively incorporated many protective doctrines for tenants: warranty of habitability, obligation to maintain the property, limits on retaliatory evictions, codified procedures for non-payment, etc. States that have adopted the Uniform Residential Landlord and Tenant Act, for example, have strengthened:

– the landlord’s obligation to deliver a habitable dwelling;

– the prohibition against raising rent or threatening eviction in retaliation for legitimate tenant complaints;

– the limitations and conditions for retaining security deposits.

Failing to study the legal framework of the targeted state (landlord-tenant law, security deposit rules, eviction timelines, any rent caps) leads to overestimating net returns (by underweighting the risks of forced vacancies, unpaid rent, and legal costs).

Rushing or Skimping on Inspections and Technical Due Diligence

In tight European markets, the temptation to “waive contingencies” to win an offer has become common. Some investors replicate this behavior in the United States, forgoing inspections or settling for a minimal standard report to “move fast.”

Yet, U.S. data shows just how catastrophic this short-term saving often is.

The Standard Inspection: Useful, But Far From Exhaustive

Recent studies indicate that:

The standard inspection remains a non-invasive visual examination: the inspector does not break into walls, does not systematically film pipes, does not perform a full air quality test or in-depth structural assessment. Many serious issues (unstable foundations, obsolete electrical wiring, degraded buried pipes, deep fungal contamination) are missed without ordering specialized checks (sewer scope, structural engineer, mold tests, etc.).

When “Saving $400” Costs $40,000

Examples abound: complete rewiring for tens of thousands of dollars, sewer line replacement for $10,000 to $25,000, repairing a cracked slab or basement wall exceeding $50,000. U.S. experts reiterate: it is not the inspection report itself that makes money, but the ability to use it to negotiate.

Trusting the Wrong Intermediaries and Signing Ununderstood Contracts

Another frequent pitfall is signing purchase agreements, management contracts, standard leases, or financing agreements drafted under U.S. law, without having them reviewed by a lawyer specializing in real estate for non-residents. The texts may contain:

– clauses of extended liability for the landlord;

– implicit tax commitments;

– provisions on arbitration or applicable jurisdiction unfavorable to a non-resident;

– additional fees and commissions hidden in the fee structure.

Simply comparing a percentage of “management fee” without reading the full contract means running the risk of:

– paying inflated maintenance costs (a 20% to 30% markup on every invoice);

– being charged lease renewal fees;

– accepting early termination penalties.

These recurring surcharges eat into NOI year after year, without always being visible in initial projections. A European investor should approach a U.S. management contract the same way they would approach an unlisted fund prospectus: line by line, ideally with independent counsel.

Accumulating Reporting and Tax Documentation Errors

Even when they have properly anticipated FIRPTA withholding, taxation on rental income, and the need to file U.S. returns, many foreign investors hit another snag: the quality of their documentation. The IRS requires a high level of precision and traceability:

– conversion of all flows into dollars using consistent rules;

– proof of dates and amounts of improvements to adjust the cost basis;

– justification of the chosen tax regime (net income election, etc.);

– compliance with specific filing obligations, including for linked bank accounts (if foreign).

– overpaying tax (inability to deduct certain expenses due to lack of proof);

– exposure to adjustments in case of an audit;

– making it very difficult for a tax advisor hired later to “repair” years of omissions.

The net profitability of a U.S. real estate investment is not limited to the level of gross rents and an exit multiple. It also rests on a fine tax mechanism, where every documented improvement reduces future tax, and every oversight becomes a hidden cost.

Forgetting That U.S. Real Estate Is In a Cycle and Marked Sector Dispersion

Studies on the recent real estate cycle show that the U.S. market is in a phase of recovery, but very uneven across sectors and locations. It is no longer a market collectively driven by expansion: it is a “K-shaped recovery” environment, with:

– sectors underpinned by strong demand (logistics, rental residential, data centers);

– segments with higher risk (traditional offices in certain downtowns, assets obsolete under new ESG standards, etc.).

In this context, it is no longer market beta that will drive performance, but the ability to select the right assets, the right cities, and the right managers.

Institutional investors

A European investor who buys an office building “because gross yields seem high” in a U.S. city facing structural vacancy and deep changes in office usage risks a long erosion of NOI with no prospect of appreciation. Conversely, a residential asset well-positioned in a dynamic metro area, even purchased at a tighter cap rate, can offer a more legible and defensive NOI growth trajectory.

Failing to Align the U.S. Investment with European Taxation

Finally, a point often mishandled: the interplay between U.S. taxation and home country taxation. Many European investors overestimate or underestimate the effect of tax treaties, foreign tax credits, and the peculiarities of their own regime (taxation of foreign real estate income, treatment of capital gains, CFC rules, etc.).

– either residual double taxation if the systems do not align perfectly;

– or no additional tax, but at the cost of increased filing complexity.

Failing to anticipate these mechanisms means risking tax assessments in your home country years later, or being in violation of obligations such as reporting foreign accounts and holdings. Again, net profitability must be calculated after all levies, not just after the IRS.

Conclusion: U.S. Profitability Must Be Earned

For a European investor, U.S. real estate can be a tremendous source of diversification and returns in a strong currency. The market is deep, asset classes are varied, and the legal environment is generally stable. But the line between a highly profitable deal and a disappointing investment is rarely decided by two or three cap rate points at purchase.

It is decided by mastering a set of parameters:

The European investor who agrees to treat these dimensions with the same seriousness as an institutional investor, by surrounding themselves with professionals experienced in transatlantic issues, then retains the essence: their ability to capture U.S. real estate performance, rather than letting it slip through the cracks of law, taxation, and hidden costs.

Conversely, those who approach this market as a mere extension of their domestic habits, assuming “it will work out,” voluntarily place themselves in the camp for whom U.S. real estate rhymes less with opportunity than with sacrificed profitability.

Cyril Jarnias

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.

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