I had not even considered inheritance tax BTW Chui. That has got my attention. In ten years I have never had a legal issue with a US tenant. Not to say it won't happen, but it hasn't yet.
I read a bit more today, and I must say I don't like what I see. http://www.firpta.com/what-is-firpta Nobody knows when they are going to drop dead, and investing overseas can be so risky in this manner. The threshold is only circa $60k for foreigners.
The person blogging here is very knowledgable. http://www.firpta.com/
http://www.firpta.com/0205-using-trusts-to-prevent-estate-tax-on-us-real-estate
Doing it right
It has to be an irrevocable trust. The person contributing the money to the trust can’t control the trust, directly or indirectly. Nor can the person contributing the money enjoy the benefits of the trust. (These are called “retained interests” in tax jargon).
The trust can be set up as a foreign trust or a U.S. domestic trust.
The typical situation for this strategy is where nonresident parents wants to provide a house in the U.S. for their child. It works best when the parents have no desire to eventually reclaim the money–they see the structure as an outright gift.
There's more about rental election. http://www.firpta.com/essential-tax-election-for-real-estate-investors. Unlike Australia, you are taxed at 30% of gross rental not net profit unless you elect to (no brainer!). The language, backed up here for posterity.
ample language
Here is a sample you can follow. Just attach this on a statement attached to the Federal income tax return filed (Form 1040-NR or Form 1120-F).
(Taxpayer Name)
(Taxpayer Identification Number)
Attachment to Form (1040-NR or 1120-F)
Tax Year Ending December 31, 2008
This statement constitutes an election under Regs. §1.871-10(d)(1)(ii) to treat the income generated from the following properties in the United States owned by the taxpayer as income effectively connected with a U.S. business for taxable year ending December 31, 20__ and thereafter:
Property 1 -
Land and Improvements located at 123 Easy Street, Anytown, USA. The structure is a commercial office building. Taxpayer holds a fee interest in the land and all property improvements located thereon. No prior election has been made under Regs. §1.871-10(d)(1)(ii) with respect to the subject property.