California remains a significant U.S. hospitality market that attracts domestic and international capital, including investor groups from Hong Kong, mainland China, and elsewhere.
Recent changes to federal tax law, including a shift to permanent 100% bonus depreciation and a more favorable business-interest limitation, have made 2026 an active year for leveraged hotel acquisitions by foreign buyers.
A hotel is not taxed like ordinary real estate: it combines real property, personal property, and, depending on the operating and leasing arrangements, an active operating business. Each layer can create distinct tax, documentation, and compliance considerations for a foreign owner, which is why entity structure, FIRPTA exposure, and financing terms need to be resolved before closing rather than after.
This blog covers how to structure ownership, what FIRPTA and Section 163(j) mean for a foreign-owned deal, how withholding applies to hotel income and distributions, where depreciation and cost segregation create value, California’s state and local tax exposure, and how to plan for exit before you close.
A single hotel acquisition typically involves several distinct layers, each taxed differently:
Each layer can create distinct tax, documentation, and compliance considerations, from entity-level income tax to withholding on payments made to foreign owners. The sections below walk through the choices, from ownership structure through exit, that determine whether an acquisition performs efficiently or creates avoidable tax cost.
Entity structure is the starting point for every cross-border hotel acquisition. It affects income tax, estate tax exposure, financing, reporting burden, and exit options.
Direct ownership of U.S. hotel real estate can create significant income tax, estate tax, and filing considerations for foreign investors. As a result, many international investors evaluate blocker corporations or other ownership structures before acquiring U.S. property. The right choice depends on the investor’s home jurisdiction, treaty position, financing plans, and intended exit.
Blocker Corporations
Many international buyers evaluate a U.S. “blocker” corporation as part of their ownership chain:
A blocker may reduce or manage certain U.S. filing and estate-tax exposures, depending on how the ownership chain is structured. It does not eliminate all U.S. compliance obligations: the corporation itself must file U.S. returns, and the foreign shareholder may still face withholding, information-reporting, or treaty-documentation requirements. The exact structure, including whether a separate property-owning entity, operating lease, and franchise arrangement are used, is fact-dependent and should be modeled for the specific deal.
Pass-Through Structures
Some investors use partnerships or LLCs taxed as partnerships instead of a blocker. This avoids a second layer of corporate tax but requires the foreign investor to file a U.S. nonresident return. It also triggers withholding under Section 1446(a): partnerships must generally withhold on effectively connected taxable income allocated to foreign partners, at rates of 21% for corporate partners and 37% for noncorporate partners. Separately, if a foreign partner later transfers its partnership interest, Section 1446(f) generally requires the transferee to withhold 10% of the amount realized, subject to exceptions and certification procedures.
Management and franchise agreements add another layer. Fees, royalties, and brand payments to the operator or franchisor may raise withholding, transfer-pricing, or sales-and-use-tax questions and should be reviewed alongside the ownership structure.
Example: Consider a Hong Kong-based investor group evaluating a $40 million hotel acquisition in Southern California. Because Hong Kong is not covered by the U.S.–China income tax treaty, the group would need to model its expected dividend withholding rate without assuming treaty benefits, and weigh that against the added complexity of a pass-through structure.
The Foreign Investment in Real Property Tax Act (FIRPTA) imposes withholding when a foreign person disposes of a U.S. real property interest. The buyer is generally the withholding agent.
Key mechanics:
Acquisition structure can materially affect the tax and withholding consequences of a later asset sale, entity-interest sale, liquidation, or distribution. Modeling FIRPTA withholding on a hotel sale before closing, not after, is what separates efficient cross-border structures from costly ones.
Most hotel acquisitions involve significant debt, often including intercompany loans from a foreign parent. Section 163(j) limits how much of that interest expense is deductible.
The deduction is generally limited to business interest income plus 30% of adjusted taxable income (ATI), subject to applicable exceptions, group rules, carryforwards, and current-law adjustments. For tax years beginning after December 31, 2024, current law generally restores the depreciation, amortization, and depletion addbacks used in calculating ATI, producing a more EBITDA-like limitation base. Other related amendments have different effective dates, so the applicable tax year and entity type should be confirmed. The limitation applies at the entity level, subject to special partnership, consolidated-group, and tiered-entity rules.
Two additional exceptions matter for mid-market acquisitions. A small-business exception may apply if the entity’s average annual gross receipts fall below an inflation-adjusted threshold, which should be verified for the applicable tax year. Separately, a real property trade or business may elect out of Section 163(j) entirely, but that election generally requires using the slower Alternative Depreciation System (ADS) and can change the economics of a leveraged deal, so it should be modeled against the cost-segregation and bonus-depreciation benefits described below.
For foreign-owned hotel entities using related-party debt, investors should separately model:
These are related but distinct issues. An above-market related-party interest rate primarily raises transfer-pricing and deductibility concerns; separately, interest paid to a foreign person may be FDAP income subject to withholding unless an exception applies.
Foreign investors often conflate two different categories of U.S.-source income.
Effectively connected income (ECI)
Income from an actively operated hotel is generally ECI, taxed at regular U.S. corporate or individual rates on a net basis after allowable deductions. Characterization can depend on the operating and leasing arrangements in place, and real property income may in some cases require an election to be treated as ECI.
FDAP income
Passive income such as certain dividends, interest, and royalties is FDAP income, generally subject to a flat 30% withholding tax on a gross basis unless reduced by a treaty or statutory exception.
The payer generally obtains the appropriate Form W-8 from the foreign recipient to establish foreign status and, where applicable, treaty eligibility, and may separately have Form 1042 and Form 1042-S reporting obligations.
The correct form depends on the payment, recipient, intermediary, and applicable withholding rules, and interest, dividends, royalties, and management fees should be analyzed separately.
Partnership withholding
As noted above, partnerships must withhold on ECTI allocated to foreign partners under Section 1446(a), at 21% for corporate partners and 37% for noncorporate partners, and a transferee generally withholds 10% of the amount realized on certain transfers of partnership interests under Section 1446(f).
Branch profits tax
A foreign corporation operating a U.S. hotel directly, rather than through a U.S. subsidiary, may face an additional branch profits tax on top of regular corporate income tax.
Treaty relief is not automatic
Reduced withholding generally requires a valid treaty, satisfaction of limitation-on-benefits provisions, and proper Form W-8 documentation. This matters most for investors from jurisdictions without full treaty coverage. Hong Kong, for example, is not covered by the U.S.–China income tax treaty, so Hong Kong-based investors should not assume treaty-reduced withholding applies.
Hotels are particularly well suited to cost segregation because they contain substantial FF&E, specialized systems, and land improvements that may qualify for shorter recovery periods than the standard 39-year schedule for commercial real property.
Cost Segregation
A cost segregation study identifies these components and allocates costs to their applicable recovery periods. It does not simply reclassify building components without engineering and cost-basis support.
100% Bonus Depreciation
Eligible property acquired and placed in service after January 19, 2025 generally may qualify for a permanent 100% first-year bonus depreciation deduction, subject to property, acquisition, placed-in-service, and election requirements.
California Non-Conformity
California does not conform to federal bonus depreciation. Federal and California depreciation schedules can differ materially, so investors should model both calculations separately rather than assuming the federal benefit carries through to state returns.
Purchase Price Allocation
The purchase agreement should allocate value among land, building, FF&E, supplies, goodwill, and franchise or brand-related intangibles, since each category carries a different tax life and treatment.
Getting this allocation right at closing, ideally alongside the cost segregation study, is easier than revisiting it later. Investors evaluating accelerated depreciation can learn more in our guide to cost segregation studies for real estate investors.
Foreign investors focused on federal rules sometimes underestimate California’s layered state and local tax structure. Depending on the transaction, hotel owners in California should plan for:
Depending on the ownership structure, foreign owners may also need to consider federal reporting obligations such as Forms 5472, 1120-F, 1065, 1042/1042-S, 8804/8805, and applicable W-8 forms.
Missing a state registration or federal filing deadline can create penalties that compound quickly across a multi-property portfolio.
Exit strategy should shape the acquisition structure, not follow it. Before closing, investors should consider how the entity structure will affect:
How FIRPTA withholding applies at each of these exit points depends directly on the structure chosen at acquisition. This is why acquisition and disposition decisions should be considered as part of a broader real estate tax strategy for developers and investors rather than treated as separate tax events.
Modeling the likely exit, including whether the eventual buyer is more likely to be domestic or foreign, before closing avoids costly restructuring five or ten years into the hold.
U.S. hotel acquisitions can involve federal income tax, FIRPTA, withholding, partnership, estate tax, California tax, property tax, employment tax, and local lodging tax rules. Results depend on the investor’s jurisdiction, ownership chain, financing, operating arrangements, treaty eligibility, and exit strategy.
This article provides general information and is not legal, tax, or investment advice. Obtain advice from qualified U.S. tax counsel and advisers before signing or closing a transaction.
ASAM LLP works with hospitality investors and international clients on acquisition structuring, FIRPTA considerations, financing, depreciation, and ongoing U.S. tax compliance. The firm coordinates with legal counsel, lenders, and other transaction advisers throughout the acquisition process, including for foreign investor groups new to the U.S. hospitality market.
If you are evaluating a U.S. hotel investment, contact info@asamllp.cpa or call +1 (415) 788-2371 to discuss the tax implications before closing.
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