Real property law in the United States is primarily derived from the common law of the states and has been modified over time by statute. Certain aspects of real estate law are governed by federal law. For example, federal law makes discrimination in real estate transactions on account of race, colour, religion, sex or national origin illegal. Environmental issues affecting real property are typically governed by federal law. US courts have also shaped real property law through the interpretation of statutes and common law, to address various issues such as eminent domain, zoning and landlord-tenant disputes.

While typically volatile, the US real estate market is currently affected by various macroeconomic factors.

The Residual Effects of Inflation

While the rate of inflation in the United States has decreased to about 2.8% as of February 2025, the inflation-affected costs of goods, labour and real estate prices remain at all-time major market highs. As a result, rental prices remain high as well. The increased cost of labour and materials has also impacted the costs of owning and operating commercial real estate. Further, these factors, along with the cost of financing generally, have affected the ability of commercial tenants to operate profitably while paying the rents that landlords require. The combination of these negative factors has had a general impact on the commercial real estate market, which has somewhat countered the upward inflationary pressure.

Moderately High Interest Rates

Federal funds rates remain steady at a range of 4.25% and 4.50%. Mortgage rates continue to hover near 7%, with the average 30-year fixed rate mortgage at 6.84% as of March 2025 – slightly higher than the rate at the same time last year.

Geopolitical Issues

The war in Ukraine continues with great intensity in its third year, and the spillover from the Gaza war and the Red Sea crisis continues, despite some efforts to end these conflicts. Perhaps more directly affecting the global economy are the various tariffs that have been floated by the Trump administration and which, as of the date of this article, have been wholly or partially implemented. It would be unsurprising if tariffs directly affecting the costs of construction materials more broadly affected the real estate industry.

Low Residential Inventory

Low rates of homebuilding and persistently high demand keep inventories tight, especially in high-cost areas. For example, according to the New York Association of Realtors, as of 20 March 2025, New York home prices have increased for 19 consecutive months, while inventory remained at record lows – not a positive combination.

Low Vacancies in Multi-Unit (Rental) Properties

Many large US cities have low vacancy rates in residential rental units, resulting from competition between potential renters leading to continued upward price momentum (although some smaller market cities have shown a cooling in prices as the rate of in-migration has slowed).

Office Space

Office vacancies persist post-COVID-19 pandemic, with hybrid work leading to downsizing. Tenants that traditionally occupy large amounts of space in the tech, financial and legal sector have opted to downsize their space as leases expire. Expectedly, new office space construction is also at a ten-year low, though with demand low this does not seem to be causing a problem.

Retail Space

The demand for commercial retail space depends on its location. However, the retail market has recovered far better than its commercial office space counterpart. Online purchasing, however, remains a competitive factor.

Blockchain Developments

Blockchain offers transparency for real estate transactions, but adoption thus far has mainly been for retail trading. Major firms such as Blackrock and Vanguard now offer Bitcoin ETFs for easy trading access. Bitcoin reached an all-time high of USD103,332.30 on 4 December 2024.

The National Association of Realtors (NAR) recently settled a landmark anti-trust litigation which accused real estate brokers of artificially inflating sales commissions. As part of the settlement, the NAR agreed to eliminate long-standing commission regulations in order to facilitate easier commission negotiation between buyers/sellers and their agents. It is hoped that the settlement will stimulate home sales by creating downward pressure on commission rates (as high as 6% of the sale price in large markets). It would not be surprising if further legislation springs from this development.

Private equity firms in the United States own approximately 500,000 single and two-family homes. Although this represents a small fraction of the existing housing inventory (and is more common in the Southwest and Southeastern United States), this has led to some backlash in an inventory-tight, high-demand, high-cost housing market. Governor Hochul of New York has proposed legislation instituting a 75-day waiting period before certain “covered” institutional investors can make offers to purchase one or two-family homes.

Property rights come in various forms:

• fee simple ownership – full ownership rights over the property, including selling, leasing, devising or mortgaging the property;
• leasehold ownership – exclusive rights to possess the property for a set term, with tenant protections, including, but without limitation, rules governing eviction and security deposits;
• occupancy interest (licence) – permission to use the property for a specific purpose, which can be revoked at any time and cannot be transferred; and
• easement – a non-possessory interest allowing another to use the property for a specific purpose, which “runs with the land” and can be transferred.

States have enacted real property laws that set forth the requirements necessary to transfer title to real property. Typically, a transfer of ownership is completed upon the delivery by the seller and acceptance of the deed by the buyer. Recording a deed is essential to protect property rights, as unrecorded deeds may be deemed void against subsequent bona fide buyers. Local governments set the recording rules and procedures.

Many states and local governments have enacted laws that impose a transfer tax (known as a deed, stamp or recording tax) on the sale of real estate. Some jurisdictions impose additional taxes, such as “mansion taxes”, which are based on the selling price of residential properties.   

Title to real estate may also be transferred pursuant to the common law principle of adverse possession, in which a trespasser may claim title to another’s land, or portion thereof, if certain conditions are satisfied. The conditions, typically set by state statutory law, generally require that a trespasser occupy the property in an “open and notorious” manner for a defined period of time. 

Additionally, many states have property condition disclosure laws in connection with the sale of residential properties. 

A lawful transfer of title to real estate is typically effected by first entering into a written contract of sale. Most US states have a so-called “statute of frauds”, which requires that agreements pertaining to the sale of real property be in writing and signed by the parties.

It is common practice for buyers of real estate to obtain title insurance which insures the buyer against loss, in the event that the seller did not have marketable title at the time of the transfer. It also protects the buyer from incurring expenses in connection with any lien that may be recorded prior to the buyer recording the deed.

A contract for the purchase of commercial real estate typically provides for a due diligence period in which the prospective buyer may engage in the following activities:

• inspection of the physical property, including an environmental inspection;
• review of financial information pertaining to both income generated by the property and the costs and expenses of operating the property;
• review of tenant leases and other rights of occupancy, such as a licence;
• obtain a title search and survey;
• review local zoning and land use regulations; and
• judgment and lien searches.

Sellers often require prospective buyers to sign non-disclosure or confidentiality agreements before providing the buyer with documents and financial information during the due diligence period.   

Representations and Warranties

Commercial properties are frequently sold in an “as is” condition and without representations or warranties regarding the state of title or the condition of the property. During a due diligence period, usually provided as a purchase agreement applicable to real property, a prospective buyer usually purchases a title report to ensure that the seller has marketable title and to learn of any encumbrances affecting the property. Prospective buyers may also retain professionals, such as engineers, architects and environmental analysts, to assess the property’s condition. 

In commercial property transactions, a seller will, however, typically make the following contractual representations: 

• that it has the lawful authority to enter into the transaction;
• that the “rent roll” and lease schedule (usually included as exhibits to the purchase contract) are true, complete and accurate, and that there are no obligations between the owner and tenant except as set forth in the leases or any amendments or modifications thereto;
• whether there is any dispute, threatened claim or litigation affecting the property or the obligations of the seller; and
• the status of any financing affecting the property.

When the sale of real estate involves transferring leases, the buyer generally requires the seller to obtain “estoppel certificates” from the tenants, which serve to confirm the terms and current status of the leases and bar the tenants from asserting any claims that contradict what is stated in such certificates. 

Buyer’s Remedies Against Seller for Misrepresentations

In commercial real estate, if a buyer discovers a material misrepresentation before the closing, the buyer can terminate the contract and seek damages. If the buyer discovers a material misrepresentation after the closing, and if such representation survives, the buyer can seek damages, equitable relief, or, in limited cases, rescission of the transaction. Although representations and warranties made by the seller may not survive closing, the parties can negotiate for some to last for a limited time period, frequently up to one year.

Representation and Warranty Insurance

The purchase of representation and warranty insurance is uncommon, except in large real estate investment trust (REIT) share sale transactions and in mergers and acquisitions, where the damages that may result from a misrepresentation justify the premium costs.   

Land use and tax law are two of the most important areas of law for an investor to consider when purchasing real estate. Investors need to have a comprehensive understanding of applicable regulations affecting the use and development of the property they are acquiring. Additionally, they should be aware of any pending or potential changes to the applicable zoning codes, such as whether an area may be ‘up-zoned”, so that future developments may be larger than what is currently permitted. 

It is also important to understand which federal and state tax laws apply to the investment property, how they are calculated, and whether there are any “caps” on incremental increases, as tax expenditures directly affect investment returns. Investors should also consider whether the property benefited from any deferred taxes based on a land use exemption, and whether the property, if acquired, would continue to be eligible for such exemption. 

Buyers of commercial real estate can be held liable to remediate contamination that arose prior to acquiring the property, though they can take measures to avoid such liability. 

Buyers should hire professionals to conduct a Phase I Environmental Site Assessment during the due diligence period, in which current and historical uses of the property are analysed to assess whether or not such uses may have contaminated the soil or groundwater beneath the property, as may occur with gas or service stations.

It is often recommended that a Phase II Environmental Site Assessment be conducted, in which soil and water samples are taken to be analysed for contaminants. If contamination is discovered, the property owner is responsible for the remediation costs pursuant to the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA), which is the main federal statute that regulates remediation of hazardous substances that pose a threat to the environment and to public health. Conducting a Phase I Environmental Site Assessment prior to closing can be done to comply with the requirements of CERCLA’s safe havens for bona fide prospective purchasers and innocent landowners, in which liability for remediation costs can be reduced or eliminated. 

A prospective buyer can ascertain the permitted uses of a parcel of real estate by examining the property’s certificate of occupancy (or comparable instrument) and by researching the applicable zoning code and land use regulations. 

It is common for developers to enter into specific development agreements with relevant public authorities in order to facilitate a project. For example, a developer may agree to contribute to a fund to help pay for investments in public infrastructure. These agreements can help developers obtain the necessary “buy-in” from elected officials and community groups needed to proceed with a project.

Federal, state and local governments have the right to exercise the power of “eminent domain”, which permits the government to “take” private property, provided that the property is used for a public purpose or to benefit the public. The 5th Amendment to the United States Constitution requires the government to provide “just compensation” to private property owners for the “taking” of their land. Jurisdictions differ as to what qualifies as a public use.

Most states, counties and municipalities tax real estate transfers based on a percentage of the purchase price.

Sellers typically pay the transfer taxes, but the parties may agree otherwise. Negotiations with respect to this issue are common. Certain types of transfers, such as transfers made pursuant to bankruptcy proceedings, may be tax-exempt. Some states also impose a transfer tax for indirect transfers, such as when there is a transfer of a controlling interest in a company that owns real property, and because of this, the parties themselves may agree on how the tax liability will be allocated among the parties.

Foreign investors can generally acquire real estate without restrictions; the USA Patriot Act prohibits US individuals and businesses from entering into real estate transactions with certain individuals, entities and foreign governments. The US Treasury Department’s Office of Foreign Assets Control maintains a list of such restricted parties. Several other federal laws and regulations apply to foreign investments in real estate, including, but not limited to:

• the Foreign Investment in Real Property Tax Act;
• the Agriculture Foreign Investment Disclosure Act of 1978; and
• the Tax Equity and Fiscal Responsibility Act of 1982.

These laws generally impose reporting or disclosure requirements in which foreign investors report the real estate transaction to the appropriate federal agency by submitting information returns. Additionally, some states prohibit foreign investors from purchasing land, and others limit the amount of certain types of land that can be acquired. 

The Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA) expanded the reach of the Committee on Foreign Investment in the United States (CFIUS), which is vested with the authority to prohibit foreign investments that it determines would adversely affect national security. CFIUS now has the authority to review the purchase or lease of controlling and non-controlling interests in real property acquired by foreign persons located in close proximity to sensitive government facilities, such as military bases and airports. If the parties to a real estate transaction believe that the transaction falls within CFIUS’s purview, they should, but are not required to, file notice with CFIUS to seek its approval. 

The commercial real estate private lending market is very large, with about USD4.75 trillion in outstanding commercial and multi-family mortgage debt. The sources of capital are diverse and encompass traditional lenders, such as large financial institutions, as well as private debt funds and real estate investment trusts (REITs) and other specialised real estate lenders.

Private debt funds, which lend short-term capital to potential real estate investors, are backed by private equity. Interest received from the debt is then distributed to the fund’s investors. Private debt funds grew following the 2008 financial crisis, during which traditional lenders were struggling and more stringent rules were created, to apply to borrowers.

REITs are publicly traded companies set up to own and operate large commercial properties. REITs are funded through the sale of securities to investors.

Lenders typically require commercial property owners and developers to put up the property being acquired or developed as collateral on the loan. The borrower may also be required to provide a personal guarantee, meaning that the borrower, or the borrower’s principal(s) or a third party, will be personally responsible for the debt, if the collateral is insufficient to cover it.

Foreign lending activity is generally not restricted in the United States; however, foreign lenders may be required to obtain licensure in the states where the lending activity occurs. Depending on the circumstances, national security clearance may also be required.

The recording of a mortgage usually requires the payment of mortgage fees and taxes, which vary from state to state. For example, in New York City, the mortgage recording tax requires purchasers to pay 1.8% on mortgage amounts under USD500,000 and 1.925% on mortgage amounts exceeding USD500,000.

In order for a security interest to attach to collateral, the debtor entity must enter into a security agreement with the lender and provide proof that it has clear title to the collateral. The mortgage or deed of trust must then be publicly registered where the land is located in order for the lender to establish the security interest in the real property.

When a borrower is in default of a loan secured by a mortgage on commercial property, the lender may pursue a “foreclosure” of the mortgage. The foreclosure process varies from state to state. In New York, for example, all foreclosures are judicial foreclosures (requiring a lawsuit to be commenced).

In many states, liens follow the “first in time, first in right” rule, meaning that whichever lien is recorded first will have priority when the funds from a foreclosure are paid. However, there are exceptions. For example, judgment liens typically have a lower priority than mortgage liens. Also, state law may prioritise certain types of liens, such as tax liens. Parties may also agree that certain liens may be or become “subordinate” to certain other liens (see 3.7 Subordinating Existing Debt to Newly Created Debt).

Foreclosure actions may take about 15 months to be concluded.

During the COVID-19 pandemic, the federal government (under the CARES Act) and various states placed a moratorium on evictions and foreclosure actions. However, the federal moratorium expired on 31 July 2021, and state-level moratoriums also ended.

There is an active market in the USA for non-performing notes (NPNs), although the size of the market varies and is spread among institutional buyers, hedge funds, private equity firms and institutional investors. NPNs are typically acquired at steep discounts, to be renegotiated, foreclosed upon or resold.

When a new creditor wants to become the senior lender, the existing lender must consent to “subordinate” its superior claim, which is achieved through a subordination agreement defining the creditors’ priority. While subordination may seem disadvantageous, it can be advantageous, such as when a lender agrees to subordinate its mortgage to a construction loan to improve the property’s marketability. These arrangements are frequently negotiated and agreed upon in advance. Some buyers consolidate and extend existing and new debt (“consolidation and extension”) over the property.

Generally, a lender cannot be so liable, provided that it does not participate in the management of the property or participate in, create or make the environmental issue worse, and that it obtains an exemption under CERCLA.       

A borrower’s insolvency does not affect the validity of a mortgage granted to secure an obligation. However, the filing of a bankruptcy petition has the immediate effect of staying the foreclosure process. A lender can seek relief from the automatic stay to enforce its security interest, if it shows “cause”, such as the debtor having no equity or uninsured property. If granted, the lender can proceed outside the bankruptcy.

States and municipalities typically leverage taxes on newly recorded mortgages. See 3.4 Taxes or Fees Relating to the Granting and Enforcement of Security for an example of the recording taxes imposed by New York State and the City of New York. Mezzanine loans, unlike traditional mortgages, are secured by a pledge of equity interests in the entity owning the real estate rather than by a direct lien on the property. As a result, they are generally not subject to traditional mortgage recording taxes in most jurisdictions.

In January 2023, the Mezzanine Debt Bill, introduced in the New York State senate, imposed a tax on the creation of mezzanine debt and preferred equity on borrowers owning real estate. If passed, the bill (currently in committee) would require a secured party to pay a mortgage recording tax prior to having the right to enforce the security interest. As of April 2025, this bill remains pending in the New York State Assembly and Senate.

Local governments create zoning codes to regulate property use and building construction. For example, “Bulk Provisions” set height, setback requirements and lot coverage limitations for buildings on individual parcels of land. Some localities have formal processes in which the public’s input is included in the decision-making process with respect to proposed zoning changes, disposition of government owned real estate, and site selection for capital projects (sanitation garages, fire houses, libraries, etc). Additionally, localities sometimes enact development plans to achieve specific purposes, such as enhancing public access to parkland or limiting the proximity of certain types of businesses (eg, bars) to schools or religious institutions.         

Many states and local governments use model building codes from the International Code Council to establish minimum construction-related standards and procedures. Local jurisdictions may adopt regulations that are stricter than model building codes to protect against known environmental hazards, such as earthquakes or hurricanes, or to meet stricter energy efficiency goals. Local governments frequently also designate landmarks and historic districts to regulate building design and appearance.

Local governments typically enact zoning codes that regulate the use and bulk of individual parcels of real estate. Additionally, jurisdictions typically have independent review boards or appeals boards that have authority to grant a property owner a variance or special permit to either develop or use a parcel of land in a manner that does not conform with local land use regulations. 

If a development complies with zoning codes, it can proceed “as-of-right”. If not, a developer may apply for variances or special permits, or seek modifications to the zoning code in order to proceed, which typically involves a public hearing. A method utilised by developers to build larger than the zoning allows is to acquire “air rights” from other properties to increase the allowable building size of their project. Air rights typically exist when the buildable square footage of a “lot” is not fully utilised by what has been built, with the undeveloped square footage constituting the so-called air rights.

Decisions made by local land use boards and legislative bodies regarding zoning and land use are generally appealable by commencing a judicial action within the appropriate locality. However, jurisdictions typically establish high standards of review on appeal, such as whether a determination was made in an arbitrary or capricious manner or whether it was “fairly debatable” and supported by substantial evidence. 

It is common practice for developers to enter into agreements with local governmental authorities or agencies to facilitate the approval of their proposed development projects. Agreements may provide that a developer will make improvements in public transit infrastructure, create privately owned public spaces or construct public-housing units in exchange for the right to “overbuild” the property. 

Permits or certificates, including a Certificate of Occupancy (COO), are required to use and occupy a building (see 7.7 Requirements Before Use or Inhabitation). Inspection(s) by the local building department and the resolution of any issues are required before their issuance. Property owners that open their buildings to the public without obtaining the necessary permits or certificates may be subject to fines and penalties as well as other actions. 

Real estate investments in the USA may be held in virtually any type of legally recognised business entity. Entity structuring has three main components: compliance, legal and tax.

In the authors’ experience, most real estate owners or investors prefer using either a limited liability company (LLC), a “subchapter S” corporation, or a limited partnership, as their entity. While these entities offer similar benefits, there are nuances that apply. Choosing the type of business entity to be utilised should be explored with knowledgeable professionals such as an attorney and an accountant.

LLCs are popular among real estate investors for their “pass-through” taxation, limited liability, asset protection and flexibility in operations and profit distribution. However, they also offer easier transferability of ownership compared to other entities, and have minimal record-keeping requirements. These benefits enhance their popularity.

S corporations are tax-designated entities under the Internal Revenue Code, suitable for real estate investors aiming to quickly profit from property flips. They also offer limited liability and asset protection, but have limitations compared to LLCs, such as a 100-shareholder limit and a single class of stock. S corporations also require more formal management and record-keeping than LLCs and limited partnerships. 

High-end commercial real estate investments are often structured as limited partnerships, with a general partner (GP) managing the partnership and limited partners (LPs) contributing capital but not participating in management. The GP has unlimited liability, and even though it is frequently an entity, this is an obvious disadvantage. LPs are only liable for their invested capital.

Limited liability limited partnerships (LLLPs) are a newer type of business entity that shield the general partner from personal liability, but are not yet widely used or recognised in all states. With 31 states and some territories allowing LLLPs, there is less legal precedent for LLLP-related litigation, making outcomes less predictable.

While other entity types (C corporations or general partnerships) may be used for owning real estate in the USA, they are less commonly utilised than the types of entities discussed above, although C corporations are typically used when the “investor” is a 401(k) retirement fund. 

LLCs are formed by filing a Certificate of Formation (or Articles of Organisation) with the state’s secretary of state (or similar agency) and paying a fee. They are governed by an Operating Agreement, which is entered into by the entity’s “members” and covers a broad range of issues including economic rights, management and member rights (such as transferring interests or handling interests in the event of death or disability).

If the LLC has a single member, the member manages the entity. If the LLC has multiple members, the entity may grant one member “day-to-day” control over the business (the Managing Member), or the entity may be “manager managed” where the entity is either managed by a non-member manager or by a board of directors or board of managers, which may delegate day-to-day authority to officers, as with a corporation. 

Corporations, including S corporations, are typically formed by filing a Certificate of Incorporation (or Articles of Incorporation) with a state’s secretary of state (or similar agency) and paying a filing fee. They are governed by by-laws for directors and shareholders, and often require annual (or more frequent) meetings of the shareholders.

Limited partnerships are formed by filing a Certificate of Limited Partnership with a state’s secretary of state (or similar agency) and paying a filing fee. Limited partnerships are governed by a limited partnership agreement that outlines each partner’s roles and responsibilities, as well as how they share in the profits and losses of the business, which results in tax ramifications for the partners.

REITs invest in real estate, leasing and collecting rental income. REITS are subject to complex tax rules and regulations, and they may provide significant tax advantages for their investors. A REIT must be formed as an entity that is taxable (federally) as a corporation.

A REIT must be governed by directors or trustees, and its shares must be transferrable. Investors receive profits in the form of dividends or as “appreciation”, upon the disposition of assets purchased by the REIT. REITs are real estate investment vehicles commonly utilised throughout the USA, and they can be classified as either public or private, traded or non-traded. Publicly traded REITs, which are regulated by the US Securities and Exchange Commission (SEC), are relatively easy to liquidate. Private REITs, which are not traded on the securities markets, are therefore generally less volatile, but are not as easy to liquidate. Private REITs may sell securities to qualified institutional investors and to sophisticated so-called “accredited” individual investors. Investing in US REITs can be a beneficial investment approach for certain foreign investors, who may benefit from investing in US REITs as they may receive ordinary dividends, capital gains and return-of-capital distributions. In addition, through sophisticated tax planning, they may reduce their US tax liability.

Some states have no minimum capital requirement for business entities, while others may require a small amount, as low as USD1,000. There is no minimum capital requirement specifically for real estate entities. However, lenders and other third parties may impose their own capital requirements. Inadequate capitalisation of the entity could expose its owners to personal liability, by piercing of the “corporate veil”, although litigation is required to achieve such a result.

State laws govern LLCs, corporations and limited partnerships, setting default rules for governance and operations, unless the entity’s owners have provided otherwise in their governing agreements. For example, state laws may require that a certain minimum voting percentage – such as 66% or two thirds of votes – be met for the entity to approve certain matters or transactions.

As stated previously, LLCs provide their members with a great deal of flexibility with respect to how the entity is structured, managed and operated, whereas S corporations (and C corporations) have stricter governance requirements and offer less flexibility. In limited partnerships, the general partner(s) provides the governance and management function, while the limited partners typically have limited voting and control rights over the entity’s affairs.

In 2024, a new federal law, the Corporate Transparency Act (CTA) was enacted in order to enhance transparency in business ownership and to combat illicit activities such as terrorism financing and money laundering. Under the CTA, business entities were to be required to disclose information to the federal government regarding their beneficial owners. However, the enforcement of the CTA has been delayed several times as a result of court decisions, and on 2 March 2025, the US Treasury Department announced that it would suspend enforcement of the CTA against US citizens and domestic business entities.

Forming and organising a business entity in the USA varies by state, costing several hundred dollars for filing documents and for using a filing agent. Some states such as New York require publication of formation documents, which adds further filing costs. Maintaining an entity involves the filing of annual reports, the payment of additional small filing fees, and franchise taxes, with accounting compliance costs varying based on entity type, income, assets and the entity’s state of operation. Attorneys and accountants typically charge for their services in forming, filing and advising in connection with these matters.

The most common arrangements to occupy and use real estate for a limited time without buying it outright include:

• leases;
• ground leases;
• subleases;
• licence agreements; and
• easements.

A lease is a contract outlining the terms under which the tenant or lessee is permitted to use and occupy the premises, and which provides that the landlord will receive regular payments of rent for a specified period of time (typically, monthly). Commercial leases are commonly used to rent retail space (stores, restaurants, etc) or to occupy an office, warehouse or industrial space.   

A ground lease (or land lease) is an agreement in which a tenant is permitted to develop a parcel of real property during the lease period, after which the land and all improvements are turned over to the property owner. Typically, ground leases involve leasing land for a long period, often between 50 and 99 years, to a tenant who will develop, construct and operate a building on the property during the lease term. Ground leases are typically financed by tenants in a manner similar to how property owners utilise mortgage financing.

A commercial sublease is an agreement between a commercial tenant, which has a lease with the landlord, and a subtenant. In a sublease, the tenant (sublessor) rents out part or all of the leased space to the subtenant (sublessee), on either a short-term or long-term basis (but the term may not exceed the remaining term of the tenant’s lease with the landlord), and the tenant-sublessor remains responsible for fulfilling its obligations under the original lease with the landlord, even if the sublessee defaults. A sublease differs from a lease assignment in that the assignee of the lease “becomes” the tenant, whereby with a sublease the sublessor “remains” the tenant.   

While a lease grants possession of real estate, a licence grants only the right to engage in specific activities, typically for a limited (sometimes brief) period. Examples of licences include the right granted to a vendor to sell its product(s) on the licensor’s property, or the right to hold an event such as a concert or to place a vending machine(s) on the licensor’s property.

An easement is a legal right that allows the holder of the easement to use property that it does not own or possess, for a specific purpose. For example, an easement may allow a utility provider to enter onto a property in order to install or maintain electrical infrastructure. Some easements are said to “run with the land” so that they continue, or “run with the land”, upon the property’s transfer. Other easements are referred to as being “in gross”, meaning that the easement is “personal” to the easement holder and does not “run with the land” upon the property’s transfer. 

Commercial leases generally include absolute leases, gross leases, net leases, percentage leases, variable leases and ground leases. Absolute leases are long-term agreements where tenants pay all operational and maintenance costs related to the property, including structural maintenance and repairs. Gross leases, which are typically described as either “full-service” or “modified”, are primarily used for office or retail space. In a “full-service” gross lease, the tenant receives one invoice covering the base rent, utilities, insurance and tenant’s share of taxes and common area maintenance costs, and the landlord pays all such amounts to third parties, as necessary. A “modified” gross lease typically occupies the middle ground between a gross lease and a “triple net” lease, where the tenant pays base rent, utilities and a portion of operating costs. 

“Triple net” leases are long-term agreements where tenants pay most operational and maintenance expenses for commercial buildings, warehouses or industrial spaces. Landlords are typically responsible for external structural repairs.

In a “double net” lease, the tenant typically pays the landlord the base rent together with the tenant’s pro rata share of real estate taxes and insurance, and the landlord is responsible for paying the costs of maintaining the building’s common areas and making structural repairs. 

In a “single net” lease or “net lease”, the tenant pays the landlord the base rent and the tenant’s pro rata share of real estate taxes, and the landlord is responsible for paying the various other building expenses and making structural repairs.

In a “percentage” lease, which may be used for a retail business, the tenant pays a lower base rent plus a percentage of gross revenues earned at the demised premises.

In a “variable lease”, the rent structure changes over time. For example, in an index lease, the base rent amount is tied to a particular “index” such as the Consumer Price Index, whereas in a “graduated lease”, the base rent increases according to a predetermined schedule.   

In a ground lease (see 6.1 Types of Arrangements Allowing the Use of Real Estate for a Limited Period of Time), a tenant is permitted to develop a parcel of real property during the lease period, after which the land and all improvements are turned over to the property owner.

Rents and lease terms in commercial leases in the USA are freely negotiated without regulation, unlike some residential leases, which may be subject to state or local regulation (such as “rent control” or “rent stabilisation” in New York City). During the COVID-19 pandemic, federal and state governments implemented eviction and foreclosure moratoria to protect tenants. COVID-19-related government regulations varied widely by jurisdiction (states) and between residential and commercial tenants; however, most such regulations have expired as the pandemic subsided, although some court dockets relating to landlord-tenant disputes remain backlogged.

As commercial leases in the USA may be 80 pages or even longer, it is difficult to summarise their terms here. However, three important issues are identified and discussed as follows.

Length of Term

Commercial leases often have terms of between five and 20 years. Although the term negotiated will vary based on the property type and class, its location and the landlord’s requirements, retail tenants (which are often franchised businesses) typically require an initial term of not less than ten years (as it is common for franchise agreements to have an initial term of ten years). Many franchises also include renewal provisions, so the franchisee (tenant) will also seek lease renewal terms to match. The authors seek to include a provision in the lease so that the term(s) of the lease and the terms(s) of the franchise agreement will commence and expire on the same day as each other. Commercial tenants have no right to renew the lease unless such a right is negotiated and reflected in the lease as an “option”. A franchisee’s (tenant’s) ability to secure one or more renewal lease terms also provides significant value to the franchisee/tenant if it chooses to sell its business and seeks to assign the lease to its buyer.   

Maintenance and Repair

Commercial leases typically make tenants responsible for maintaining and repairing the leased premises, while landlords are responsible for making exterior and structural repairs. For multi-tenant properties, landlords usually maintain the common areas and then charge their tenants for the maintenance costs based on each tenant’s “proportionate share” of the rentable total square footage of the building.

Frequency of Rent Payments

Rent payments are generally paid on a monthly basis throughout the entire term of the lease, and they are usually due on the first day of each month. Most leases provide for the payment of late fees if the rent is not received by a certain date (ie, the fifth day of the month). Sometimes ground leases call for a significant “up-front” rent payment when the lease commences, followed by scheduled rent payments throughout the term (frequently, made annually). 

The rent payable will rarely remain the same during the term of the lease. It will usually increase.

In commercial leases, base rent is negotiated prior to entering into the lease, and the lease typically contains a schedule of base rent due under the lease. As commercial leases usually have an initial term of between five and 20 years, it is common for rent increases to be implemented on a percentage basis (eg, between 3% and 5% of the then-applicable amount), and frequently on an annual and cumulative basis.

If the lease provides for one or more options to renew, increases to the base rent are often negotiated in advance and set forth in the lease. However, sometimes the landlord does not want to negotiate the new base rent for a renewal term (which may commence many years in the future) at the time that the lease is entered into, and requires that the new rent be “fair market” as determined prior to the effective date of the renewal period. Such lease provisions often provide that, in the event that the parties are unable to agree on the “fair market” rent, they will use a neutral mediator to help them reach an agreement, and that if the issue remains unresolved, an arbitrator with local real estate industry experience will determine the “fair market” rent after reviewing both sides’ evidence.

Some leases utilise so-called “baseball arbitration” where the landlord and tenant each submit their evidence, which may include an “expert’s report”, and its “number” as to what the rent should be; the arbitrator selects one side’s number as the “fair market” rent, as opposed to awarding a “compromise” between the two proposed numbers. Utilising “baseball arbitration” incentivises the parties to be reasonable or risk losing the arbitration. The lease may authorise the arbitrator to award attorneys’ fees, expert fees and costs to the successful party in the arbitration.

No states in the USA charge value-added tax (VAT) on rent. However, certain local jurisdictions impose sales or occupancy taxes on base rents, particularly if the lease exceeds a certain length of time.   

When signing a commercial lease, the tenant usually pays the landlord the first month’s rent and a security deposit. This deposit serves as “security” for the landlord in case the tenant defaults on payments that are due under the lease or damages the property without repairing it. The deposit amount is usually negotiable, but not always, and it often ranges between two to six times the monthly base rent. The security provisions may be negotiated in various ways, so that (for example) the security could increase as rent increases over the term, or, conversely, the amount of the security could decrease as time passes.

In many commercial leases, landlords maintain common areas such as lobbies, parking lots (repairs, snow removal) and gardens (landscaping), and charge Common Area Maintenance (CAM) fees to tenants, based on their proportional share of the total leasable space. However, some leases include these CAM expenses in the tenants’ base rent.

Most commercial leases provide that the tenant is responsible for arranging and paying for its utilities and telecommunications services (other than for water, for which the landlord may bill the tenant based on the tenant’s usage of water as read by a “meter”). Usually, most utility costs for the common areas of the building are billed to the tenants (in addition to the base rent), based on their respective proportionate shares of the total leasable space in the building.

There is no standard answer as to who is responsible for paying real estate taxes under commercial leases, because this will vary depending on the type of commercial lease. However, in many commercial leases, which are “modified gross” leases, tenants are required to pay their “proportionate share” of real estate tax increases over a negotiated “base year” as opposed to the full amount of real estate taxes. For example, if the tenant occupies 20% of the total rentable space in the building, the tenant’s proportionate share is 20%, so that, if the increase in taxes over the base year after the tenant’s first year in possession (often the first year of the lease) was USD100,000, the tenant’s proportionate share of the real estate taxes would be USD20,000. Notwithstanding the above, in many “net leases” (eg, “absolute” leases, “triple net” leases, “double net” leases and “single net” leases), the tenant is obligated to pay all of the real estate taxes, whereas the landlord is responsible for paying some of the other operating expenses, depending on the type of net lease (except that in “absolute” and  “triple net” leases, the tenant is responsible for paying all of the operating expenses, including taxes).     

With respect to residential leases, the owner/landlord usually pays all the real estate taxes assessed on the property.

While landlords purchase and maintain their insurance with respect to the property, it is standard for commercial leases to require each tenant occupying a portion of the property to purchase and maintain – at its own cost and expense – specified levels and types of insurance. Where a single tenant occupies the entire property and is responsible for the various operating costs of the property – for example, under a so-called “triple net” lease – the tenant, and not the landlord, is responsible for purchasing and maintaining all required types of insurance. General liability insurance typically provides coverage for claims arising out of bodily injury or property damage suffered by third parties. Some general liability policies include a specific endorsement that provides limited coverage for fire damage to the leased premises, but this is typically limited and generally does not cover all types of damage or perils (eg, floods, earthquakes, etc) to the leased premises.

Commercial tenants are usually required to purchase and maintain business interruption insurance. During the COVID-19 pandemic, however, insurers took the position that losses attributable to government-mandated shutdowns were not covered under their business interruption policies. In most litigations throughout the USA, courts largely sided with insurers’ decisions to disclaim coverage under tenants’ business interruption policies.

Commercial leases typically contain a “use” clause which describes the tenant’s permitted use of the premises. The scope of this clause is negotiated between the parties and is frequently influenced by their respective bargaining strengths. Leases usually specify certain prohibited uses or activities. Local land use and zoning laws may impose further restrictions on the tenant’s use of the premises. Retail tenants in a shopping mall or strip centre may seek to negotiate an “exclusive use” provision, where the landlord agrees not to lease other premises located in the shopping mall to a competing business. Sometimes, with a financially strong tenant (such as an “anchor” tenant), the tenants’ exclusive use provision may extend to surrounding locations also owned by the landlord.

Commercial leases typically require the tenant to obtain the landlord’s written consent before the tenant is permitted to alter or improve the demised premises. Usually, leases also require that all plans, drawings and specifications be submitted to the landlord for its approval, and that the tenant ensures that all work be performed in a good and workmanlike manner and be free from defects. Tenants may try to negotiate that the landlord’s granting of consent will not be “unreasonably withheld, conditioned or delayed”, rather than being at the landlord’s “sole discretion”.

Residential tenancies (apartment rentals) in urban areas are often regulated in various ways according to state and local jurisdiction, including with respect to rent control or rent stabilisation, requiring lease renewals, prohibiting discriminatory practices, and imposing health and safety rules. Commercial leases are subject to common law, including “nuisances”, as well as a variety of regulations including (for example) building codes, zoning laws, land use regulations, and health and safety laws, all of which vary by jurisdiction. Also, the Americans with Disabilities Act (ADA), a federal civil rights law that prohibits discrimination against individuals with disabilities, guarantees accessibility to buildings and public properties, including commercial properties and multi-family residential properties.

During the COVID-19 pandemic, various eviction and foreclosure moratoria were put in place to protect both residential and commercial tenants. However, virtually all pandemic-related regulations to assist tenants have expired. 

A tenant’s insolvency will usually enable the landlord to terminate the lease and commence proceedings to evict the tenant. However, if the tenant files for federal bankruptcy protection, an “automatic stay” is triggered and all creditors of the tenant – including the landlord – are required to immediately cease all collection enforcement or eviction efforts against the tenant. This notwithstanding, the landlord may be permitted to continue pursuing an eviction if it obtained a judgment of possession prior to the tenant’s filing for bankruptcy. Under the federal bankruptcy code, the commercial tenant must choose to either assume or reject an unexpired lease. If the tenant assumes the lease, it must continue performing under the lease and must pay any past due amounts. If the tenant rejects the lease, the landlord is permitted to take back possession of the premises, and it may make a claim for damages as provided for in the bankruptcy code.     

Generally, when a commercial tenant “holds over” after the lease expires or has been terminated, the tenant no longer has a right to continue occupying the leased premises, and the landlord can either bring a proceeding to evict the tenant, or it can acquiesce for a period of time and continue collecting rent. Commercial leases typically provide for a significantly higher “holdover rent” (eg, 1.5 times or even twice the amount of base rent) which applies after the lease has expired or has been terminated. This strongly incentivises tenants to vacate the leased premises upon the expiry or termination of the lease. Landlords also seek to protect themselves against a “holdover” tenant through their enforcement of any personal guarantees (which are commonly provided by the tenant’s principal(s)) that have been executed in connection with the lease.

Most leases provide that the tenant cannot assign the lease or sublease any portion of the premises without the landlord’s prior written consent. Landlords usually condition their consent on the assignee:

• being bound by the terms of the lease;
• having a certain net worth; and
• providing a personal guaranty (of some kind) by its principal(s).

An issue often arises as to whether or not the tenant and the lease guarantor(s) will be released from their respective obligations once the assignment takes effect. Tenants often seek a modification providing that the landlord’s consent to a lease assignment will not be “unreasonably withheld, delayed or conditioned”. Tenants may also negotiate a revision providing that the landlord’s consent is not required for certain transfers (ie, transfers between existing principals, to a principal’s family member or to an affiliated entity). Some franchisors require their franchisees to include a provision in a lease rider indicating that the landlord will be deemed to have consented to an assignment (or sublease) of the lease to the franchisor, its affiliate or another franchisee (either existing or newly approved). Franchisees (tenants) may also wish to negotiate with the landlord to include such a provision in the lease (to simplify the lease assignment process when they seek to sell their franchised business) even where the franchisor has not required or sought to include such a provision in the lease.

Generally, a landlord will terminate the lease when the tenant fails to cure a default, whether monetary or otherwise. Leases commonly provide that the landlord may terminate the lease without the tenant having an opportunity to cure the default, upon the occurrence of certain triggering events, including (for example) if the tenant files for bankruptcy, is insolvent or permits an illegal activity to be conducted at the leased premises. Leases may also permit either or both sides to terminate the lease if a casualty occurs to a significant portion or the entirety of the leased premises, and if the leased premises are incapable of being restored within a defined time period. 

Leases do not typically require registration or execution formalities (unlike other real estate documents, such as deeds). Most states do not require that a lease (or memorandum of lease) be recorded as a public record, although many states permit such publication. However, landlords sometimes prohibit the tenant from recording the lease (or a lease memorandum) because the landlord does not want its lease (or its key terms) to be publicly available.

If the landlord terminates the lease in accordance with its terms (eg, following a default that either was not timely cured or was not curable), the landlord may commence a court proceeding to evict the tenant. The process for evicting a tenant varies widely depending on the jurisdiction and whether the tenancy is residential or commercial. (The eviction process for commercial tenancies moves much more quickly.) While many jurisdictions passed eviction moratoriums (and sometimes even foreclosure moratoriums) during the COVID-19 pandemic, virtually all such tenant protections have expired as of the writing of this article.

No federal, state or local government has authority to terminate a lease that is entered into by private parties. However, governmental authorities may have a right of eminent domain that permits them to “take” property for public use and pay “just compensation” to the owner. As a “taking” would render moot any lease at the premises, leases typically provide for their termination, with no further obligation by either side, under such circumstances.

In the event of breach and termination, landlords’ remedies vary based on the applicable jurisdiction. For example, a landlord’s potential “double recovery” of rent (ie, for the unexpired portion of the lease and collecting rent after it has re-let the premises) will vary based on applicable law, and may be permitted where (for example) the prematurely vacating tenant chooses not to engage in the discovery process in the litigation (to find out whether the landlord has re-let the premises). Landlords are often precluded from using “self-help” to evict tenants (for example, by locking the tenant out), as opposed to going through the court eviction process. Self-help evictions are illegal in most states and usually result in a lawsuit by the tenant. Landlords who engage in self-help evictions can face damages, fines, criminal charges, and possibly jail time. 

As discussed in 6.8 Costs Payable by a Tenant at the Start of a Lease, landlords typically require tenants to tender a security deposit (usually “cash”, but sometimes a letter of credit is utilised) when the lease is being entered into, in order to protect the landlord against a tenant’s failure to meet its obligations, including the payment of rent and additional rent. The amount of the security deposit is usually negotiable, but not always, and it often ranges between two to six times the monthly base rent. Often, the amount of security increases as the rent increases over the term of the lease, but in some leases tenants are able to negotiate for the security to decrease over time.

Various structures are used to price construction projects. They include the following.

Fixed Price

General contractors may agree to complete the project for a predetermined fixed price, regardless of any additional costs or changes to the work. Construction lenders like to see fixed-price contracts as a part of the properties they are financing.

Cost-Plus

Under a cost-plus pricing structure, the general contractor is reimbursed for the costs of the project, plus a percentage above cost. Cost-plus pricing structures are typically used when the scope of the project is unclear, or if numerous project changes are anticipated.

Time and Materials

This structure is typically used for small projects and where the amount of work is unclear. The general contractor is paid for the actual cost of labour and materials, plus an additional fee or percentage for the general contractor’s profit.

Unit Price

This cost structure is typically used for projects with repetitive units of work (eg, roads or utilities), but it can also be used for apartment development or the development of a housing project of similar homes or structures. The general contractor may be paid based on a square footage or “per unit” basis.

Guaranteed Maximum Price

This cost structure is typically used for well-defined projects, and it provides certainty for the owner while incentivising the contractor to manage costs efficiently. Under this pricing structure, the general contractor agrees to be reimbursed for the actual cost of the project, plus the general contractor’s profit, up to a maximum “capped” price.

Responsibility for design and construction of a project can be handled in a variety of ways, but the following methods are most common.

Design-Bid-Build

This is the traditional method of construction where the owner hires an architect or engineer to design the project. General contractors then bid on the project. The lowest bidder typically gets the assignment and is responsible for completing the project according to the plans. Other factors, such as the general contractor’s reputation (good or bad) may, however, play a part in the selection process.

Design-Build

This is when the owner hires a single design and construction firm to complete the project.

Construction Manager at Risk

This is a project delivery method where a construction manager oversees the project from start to finish and takes on a significant portion of the project’s risk by providing a guaranteed maximum price. The construction manager is involved early in the project and is responsible for managing the design phase. After the design phase is completed, the construction manager steps into the role of a general contractor and completes the project.

Integrated Project Delivery

This approach is used in highly complex projects in which the owner, architect, general contractor and other parties work collaboratively to develop the design and construction plan. Designing and calculating is a challenging aspect of this approach.

Various devices can be used to manage and mitigate construction risk in a project, all of which may be subject to various legal limitations and exclusions. Examples are as follows.

Contractual Indemnification

This provides for one party to defend, indemnify and hold harmless the other party from certain losses or damages; for example, a contractor may be contractually bound to indemnify the owner from personal injury suits brought by workers and subcontractors related to the contractor’s negligence.

Warranties

These are promises by one party to the other party regarding the quality or performance of the workmanship and materials used in the construction; for example, a contractor may warrant that its work will be free from certain defects for a period of time following the completion of the work.

Limitations of Liability

These provisions limit the amount of damages that one party can recover from another party; for example, the contractor’s liability for the owners lost profits or business interruption may be limited to a defined amount or paid in a certain manner.

Damage Waivers

These typically provide for one party to agree to waive its right to recover for certain types of damages where a breach of contract or other event causes damage. It is typical during the course of each stage of design and construction for a contractor to request the owner to sign damage waivers related to work that has been completed, inspected and accepted by the owner.

Schedule-related risk is a significant issue for construction. However, there are various ways to mitigate the risk.

Construction agreements typically contain liquidated damages provisions in which the owner may receive stipulated compensation if the project is not completed by the date called for, and additional costs and expenses are incurred by the owner as a result of the delay. The general contractor may also seek such protections from its subcontractors.

Parties may also build in stipulated rights to extend timeframes under certain circumstances with or without additional compensation. For example, if certain unforeseen site conditions occur (eg, bad weather or “strikes”, or even pervasive illness delaying construction), the contractor may have the right to extend its deadlines.

The parties can also avoid delays through regular communication, during which they devise contingency plans, such as reallocating resources and adjusting schedules.

The following are typical examples of additional security provided by contractors.

Performance or Completion Bonds

These are a form of surety bond that guarantees that the contractor will complete the project on time. If the contractor fails to do so, the surety company will cover additional costs required for the developer to finish the project.

A Letter of Credit

This is a financial instrument issued by a bank that guarantees payment to the project owner if the contractor fails in its performance. In the event of a default, the owner may draw upon the letter of credit to pay for the project’s completion, as needed.

Parent (or Third-Party) Guarantees

These are provided by the contractor’s parent company (if it has one) or by a financially responsible third party, to guarantee the performance of the contractor.

Escrow accounts may be used to hold funds by a third-party escrowee until the contractor meets certain conditions or milestones, after which the funds are released to the contractor.

Third-Party Surety

This is a company that provides a guarantee of performance on behalf of the contractor (eg, a surety bond, letter of credit, etc).

Contractors and designers may file “mechanics liens” to preserve their right to seek compensation if the owner fails to pay their fees. In the commercial context, mechanics’ liens are typically filed by contractors who have not been paid for work related to the project.

Mechanics liens create a “cloud on title”, which appears on the public record and may impair the ability of the owner to sell, transfer or mortgage the property until the debt is paid and the mechanics lien is discharged or “bonded” by the contractor – frequently a precursor to litigation.

Some contracts include “lien waiver” provisions that permit claims but restrict the unpaid party from filing a mechanic’s lien against the property.

A Certificate of Occupancy (COO) must be issued by the local or municipal authority before project can be used for its intended purpose.

The issuance of a COO is subject to various requirements such as an inspection or review of final plans prepared by a licensed architect or engineer.

For example, in New York City, building permits must first be obtained prior to commencing any work. Then, at various stages of the construction work, components of the project – such as the structural build, plumbing installation, electrical systems and elevator (if applicable) – must be inspected and “signed-off” prior to the issuance of a final COO.

Frequently, the project’s “expediter” will seek to help shorten the timeframe when the issuance of the COO has been delayed.

The United States does not impose VAT on the purchase and sale of real estate. Certain jurisdictions impose a sales and use tax on commercial leases, as more fully discussed in 8.3 Municipal Taxes.   

There are two commonly used methods to mitigate transfer taxes in connection with the acquisition of large real estate portfolios. One technique is to sell equity interests in the entity that owns the real estate as opposed to transferring the real estate outright. However, this option is not available in states that impose transfer taxes on such indirect transfers of a controlling interest in an entity owning real estate. Where states and local governments impose a mortgage recording tax, the use of a Consolidation, Extension and Modification Agreement (sometimes in connection with a “spreader” agreement in order to have the mortgage cover multiple parcels) may be used to reduce mortgage recording taxes. This occurs by giving the borrower a credit for previously paid mortgage recording taxes and including the existing mortgage with the new financing (consolidation), rather than paying off the existing mortgage and including the amount of the prior mortgage in the new mortgage (presumably for a larger amount), on which a recording tax must be paid. 

Some jurisdictions impose taxes on commercial leases. For commercial rental periods occurring after 1 June 2025, Florida imposes a state-wide sales and use tax on tenants of 2% (down from 4.5%) on the total rent charged under a lease or licence to use commercial real property. Florida provides tax exemptions for certain types of real property (such as agricultural land) and tax exemptions for use by certain entities (such as non-profit organisations and qualifying governmental entities). New York City imposes a “commercial rent tax” with an effective tax rate of 3.9% on the annual or annualised gross rent of USD250,000 or more paid by certain commercial tenants located south of 96th Street in Manhattan. 

Three main types of withholding taxes apply to foreign investors.

The Foreign Investment in Real Property Tax Act of 1980 (FIRPTA), which imposes a tax on gains from the sale of real property by foreign sellers, requires that the buyer serve as a “withholding agent” to retain and remit to the Internal Revenue Service (IRS) 15% of the purchase price paid to the seller, unless the seller provides proof of its non-foreign status, typically by providing a sworn Affidavit of Non-Foreign Status from a principal of the seller.   

Any US partnership that generates income in connection with a US trade or business (“effectively connected income”, or ECI) must pay a withholding tax on any ECI that is allocated to a foreign partner. The tax withholding rate is 21% if the foreign partner is a corporation and 37% if the foreign partner is a non-corporate taxpayer. Also, a buyer of an interest in a partnership that is engaged in a US trade or business is required to withhold 10% of the purchase price paid to the foreign seller. 

Foreign individuals must pay federal income tax on long-term capital gains at a preferential maximum rate of 20% if the real property was sold after a holding period of at least 12 months, or a maximum rate of 37% if such property was held for less than 12 months. Foreign corporate sellers are subject to income taxes equal to 21% of the gain from the sale of the real property, regardless of how long the property was held. Foreign corporations may also be subject to a “branch profits tax” at the rate of 30% (or less, if provided in an applicable treaty) of the after-tax earnings from a US trade or business, to the extent that such earnings are not reinvested in US branch assets.   

As an incentive for the ownership and development of real estate in the United States, the US federal tax code provides owners of real estate with certain tax benefits. 

Real estate investors are permitted to depreciate the costs of buying and improving a building (excluding the land, which is not considered a “depreciable asset”) in order to reduce taxable income over a certain period of time. However, taking such deductions reduces the owner’s cost basis in the property, which becomes relevant – and is likely to result in increased capital gains taxes – when the property is sold. 

Section 1031 of the federal tax code permits owners of real estate held for investment to defer paying capital gains tax if the proceeds from a sale are reinvested in a “like-kind” property within a specified period of time.  This tax benefit is particularly useful when selling heavily depreciated property. 

The federal tax code also provides for a capital gains tax exclusion in connection with the sale of one’s primary residence. The exclusion is USD250,000 of profit for an individual, or USD500,000 of profit for married couples, filing jointly.