IRC 2104: U.S. Property Rules for Nonresident Aliens

For a non-resident alien, U.S. situs property is the set of assets the federal government treats as located in the United States for estate tax purposes: shares in U.S. corporations, debt owed by U.S. borrowers, real estate on American soil, tangible items physically present in the country, and certain lifetime transfers that retained a connection here. Everything else the non-resident owned worldwide falls outside the U.S. estate tax net. The classification carries real weight because a non-resident alien’s estate gets a unified credit of only $13,000, which shelters roughly the first $60,000 of situs property, and pays up to 40% on the rest.¹

Why the Situs Line Matters

A U.S. citizen or resident owes estate tax on assets located anywhere in the world. A non-resident alien (NRA), by contrast, owes only on U.S. situs property. That single distinction drives the entire analysis, because the same asset in the same portfolio can be taxable or exempt depending on how the situs rules classify it.

The exemption equivalent for an NRA estate is small and it has not moved in decades. The $60,000 threshold is not indexed for inflation, and a modest brokerage account holding U.S. stock can push an estate over it.² Rates track the schedule that applies to citizens and residents under Section 2001(c), topping out at 40% for taxable amounts above $1 million.³ An estate with U.S. situs property over $60,000 must file Form 706-NA.

NRA status itself turns on domicile, not citizenship alone. A person is an NRA for estate tax purposes if they were neither a U.S. citizen nor domiciled in the United States at death, and domicile requires living here with no definite present intention of leaving. A Green Card alone does not settle the question.⁴

Stock in U.S. Corporations

Shares of a domestic corporation are always U.S. situs property. The location of the certificates, the residence of the shareholder, and where the company earns its money are all irrelevant. If the company was organized under the laws of a U.S. state or the District of Columbia, the stock counts.⁵ A Delaware holding company that operates entirely overseas still produces U.S. situs stock.

Foreign corporate stock is the opposite. It is generally not U.S. situs property, even if the foreign company owns American real estate or runs a large U.S. business. No statutory look-through reclassifies foreign stock based on what the company holds.⁶ Placing U.S. situs assets inside a foreign corporation is one of the standard structures used to keep those assets out of an NRA’s taxable estate: the estate then owns non-situs foreign stock rather than the situs asset directly.

Mutual funds get a partial pass. Under Section 2105(d), shares of a regulated investment company are excluded from situs in proportion to the fund’s assets that themselves would not be U.S. situs property.⁷ A fund that holds 30% foreign bonds and 70% U.S. equities is 70% situs property.

Debt Owed by U.S. Borrowers

Debt is situs property when the borrower is a U.S. person, the federal government, a state, or a local government. U.S. person here means a citizen, a domestic corporation, or a domestic partnership. Corporate bonds issued by American companies, Treasuries, and municipal bonds all qualify. Where the collateral sits and where payments are made do not enter the analysis.⁵

A mortgage note follows the borrower’s identity, not the collateral. A note secured by U.S. property but owed by a foreign corporation is not situs property. A note owed by a U.S. person is, even if the underlying property sits abroad.

The Portfolio Debt Carveout

Section 2105(b) removes from situs any U.S. debt obligation whose interest would have qualified for the portfolio interest exemption if the NRA had received it while alive.⁷ For most publicly traded U.S. corporate bonds held by an unrelated NRA investor, that exemption applies, and the bonds effectively drop out of the taxable estate.

Three situations knock a debt out of the carveout. The first is a 10% ownership stake: an NRA who owns 10% or more of the voting power of a corporate issuer, or a 10% capital or profits interest in a partnership issuer, cannot use the exemption, and attribution rules can pull in shares held by related parties.⁸ The second is contingent interest tied to the borrower’s profits, receipts, or cash flow. The third is debt effectively connected with a U.S. trade or business the NRA conducts. Original issue discount obligations follow the same logic, and short-term paper payable within 183 days of issue is generally exempt regardless.⁷

Real Estate and Tangible Property Located in the U.S.

Physical location controls for tangible assets. U.S. real estate is situs property, full stop. Land, buildings, and anything permanently attached count, whether the NRA holds a vacation home, a rental, or a commercial building.⁴

Tangible personal property follows the same rule. Jewelry, artwork, cars, furniture, and the contents of a safety deposit box are U.S. situs property if they were physically inside the country when the NRA died.⁹ Valuables brought into the country for storage or personal use are caught by this rule.

Two narrow exclusions apply. Artwork imported solely for exhibition, loaned to a public gallery or museum that does not distribute earnings to private individuals, and on display or in transit to or from the exhibition at the time of death, is not situs property; all three conditions must hold. Ships and aircraft used primarily in international commerce are also excluded.⁷

What Section 2105 Excludes Even Though It Looks American

Several categories with obvious U.S. connections are removed from situs by statute.

Bank Deposits

Cash held on deposit at a U.S. bank, savings institution, or similar financial institution is not U.S. situs property, so long as the interest is not effectively connected with a U.S. trade or business.⁷ Deposits at foreign branches of domestic banks are also excluded.⁴

One wrinkle catches people off guard. Deposits at a U.S. branch of a foreign bank are treated as U.S. situs property under Section 2104(c), which specifically includes them as debt obligations.⁵ Money at a U.S. branch of a domestic bank is out. Money at a U.S. branch of a foreign bank is in.

Life Insurance Proceeds

Proceeds payable on the life of an NRA are not U.S. situs property. The exclusion is unconditional. It doesn’t matter whether the insurer is a U.S. company, where the policy was issued, or who receives the payout.⁷ That makes life insurance a useful source of liquidity for paying estate tax on other assets without adding to the taxable estate itself.

Partnerships and LLCs: The Unsettled Area

Section 2104 does not address partnership interests, the Treasury regulations are silent, and there is no authoritative federal case law resolving how to place them. The IRS spoke to the question once in a 1955 revenue ruling that tied situs to where the partnership business is carried on, but most commentators view that ruling as unreliable and possibly outdated.

The unresolved question is whether a partnership interest is a single intangible asset (the entity approach, situs based on where the partnership was organized or administered) or a proportional share of the underlying assets (the aggregate approach, situs based on the location of each asset the partnership holds). An NRA holding an interest in a partnership that owns U.S. real estate faces very different outcomes under the two theories. Some bilateral estate tax treaties, including those with France, Germany, and the Netherlands, impose a look-through approach for treaty purposes, but domestic law stays unresolved. Conservative planning generally assumes the position that produces the most tax, which usually means treating the interest as situs property to the extent the partnership holds U.S. assets.

Transfers With Retained Interests or Within Three Years of Death

Section 2104(b) pulls back property an NRA transferred during life but did not fully let go of. Revocable transfers, retained life estates, and transfers made within three years of death (within the meaning of Sections 2035 through 2038) are deemed U.S. situs if the property was located in the United States either at the time of the transfer or at the time of death.⁵ Moving U.S. situs assets into a revocable trust or making deathbed transfers will not clear them out of the estate.

Why the Gift Tax Rules Change the Planning Picture

The gift tax situs rules for NRAs are far more favorable than the estate tax rules. Under Section 2501(a)(2), an NRA’s gifts of U.S.-situated intangible property are not subject to U.S. gift tax at all, and stock in U.S. corporations counts as intangible property.¹⁰

The contrast drives a lot of NRA planning. An NRA holding $5 million in U.S. corporate stock at death owes estate tax on the full amount above $60,000, up to 40%. That same NRA could have given the stock away during life with no U.S. gift tax. Gifts of U.S. real estate and tangible personal property located in the United States are still subject to gift tax, so the free pass applies only to intangibles.¹⁰ Section 2104(b)’s three-year rule limits how close to death this can be done.

Treaties Can Override the Domestic Rules

The United States has bilateral estate or gift tax treaties with 15 countries: Australia, Austria, Canada, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, the Netherlands, South Africa, Switzerland, and the United Kingdom.¹¹ These treaties can change the answer significantly.

The biggest treaty benefit is usually a larger unified credit. Several treaties let the NRA’s estate claim a prorated share of the full U.S. citizen exemption based on the ratio of U.S. situs assets to worldwide assets, rather than the $60,000 equivalent. For an NRA whose U.S. holdings are a small share of total wealth, the prorated credit can eliminate or sharply reduce the tax. Treaties can also change how situs itself is determined for specific asset types, including partnership interests, real property, debt, and business assets. The domicile country matters, and any NRA with U.S. holdings should check whether a treaty applies before relying on the domestic rules alone.

State Estate Taxes Are Separate

Federal situs is only part of the exposure. Roughly 17 to 19 states impose their own estate or inheritance taxes, and many apply to non-residents who own real property or tangible personal property within the state. State exemptions and rates vary widely and often diverge from the federal figures. An NRA whose U.S. situs property is real estate in one of these states can face both a federal and a state bill on the same asset, with separate filings for each.

1
Office of the Law Revision Counsel. 26 USC 2102 – Credits Against Tax
2
Internal Revenue Service. Estate Tax for Nonresidents Not Citizens of the United States
3
Office of the Law Revision Counsel. 26 USC 2101 – Tax Imposed
4
Internal Revenue Service. Frequently Asked Questions on Estate Taxes for Nonresidents Not Citizens of the United States
5
Office of the Law Revision Counsel. 26 USC 2104 – Property Within the United States
6
Internal Revenue Service. Some Nonresidents With U.S. Assets Must File Estate Tax Returns
7
GovInfo. 26 USC 2105 – Property Without the United States
8
Office of the Law Revision Counsel. 26 USC 871 – Tax on Nonresident Alien Individuals
9
eCFR. 26 CFR 20.2104-1 – Estates of Nonresidents Not Citizens; Property Within the United States
10
Internal Revenue Service. Gift Tax for Nonresidents Not Citizens of the United States
11
Internal Revenue Service. Estate and Gift Tax Treaties (International)