Part I · Asset Classes · No. 11

Private islands

A private island is real property — but one whose location, sovereignty, and access patterns drive the tax analysis. The U.S. owner of a Bahamian island confronts a different package of taxes than the U.S. owner of an Adirondack lake island, even though both are simply land surrounded by water.

The asset class in tax terms

For federal income-tax purposes a private island is real property of the kind discussed under trophy real estate. The location of the island governs which jurisdiction's substantive property law, transfer tax, ongoing property tax, and (where applicable) inheritance regime applies. Most foreign-located islands are subject to the local jurisdiction's property regime; the U.S. owner's federal-tax position lays a separate, parallel claim on income and disposition.

Acquisition

The acquisition cost is the principal tax-relevant variable. Foreign-jurisdiction transfer taxes apply on cross-border real-estate purchases:

• Bahamas: stamp duty on conveyance.
• British Virgin Islands: 12% non-belonger land tax on purchase of property by non-citizens, plus license fee.
• Greece: 3.09% transfer tax (Bedrock figure varies).
• Canada: transfer tax varies by province; British Columbia and Ontario also impose foreign-buyer surtaxes.
• Fiji: stamp duty plus separate fees for foreign purchase.

U.S.-located private islands attract conventional state and local transfer tax in the state of location.

Foreign-island purchases through a U.S. owner who is a U.S. person trigger U.S. tax-information reporting (FBAR if accounts opened locally, §6038D Form 8938 if the holding is through a foreign entity, and informational filings on foreign-trust use).

Holding and operation

Foreign-jurisdiction property tax, license fees, and (in some locales) annual government licensing for non-citizen ownership are recurring costs. None deductible for personal-use property by a U.S. owner; deductible for an income-producing property under §212 (limited by §164(b)(6) SALT cap for U.S. real estate; foreign property tax is no longer deductible on Schedule A after the 2017 amendment).

Operational logistics — desalination, generators, dock and mooring maintenance, transportation for staff and supplies — are tax-relevant only where the property is operated as a trade or business. A vacation island used personally generates only sunk personal-living expense.

Income from the asset

Many private islands generate no income. Some are rented (full-island ultra-luxury rental in Bahamas, Belize, and the Indian Ocean) producing rental income — passive under §469 absent material participation, subject to foreign-jurisdiction tax with U.S. foreign-tax-credit relief, and subject to §1411 NIIT for high-income owners.

A private island operated as a destination resort or as a charter base produces business income; the operational substance determines passive-or-active characterization. Aspinall-type structures (private island offered as a charter-yacht and aviation destination) can produce trade-or-business income for the U.S. owner.

Disposition

Sale of foreign real property by a U.S. person produces U.S.-taxable gain — long-term capital gain at 20% plus 3.8% NIIT plus state, with foreign-tax credit for any local capital-gain tax. The §121 principal-residence exclusion is generally not available unless the island has been the U.S. owner's principal residence for the required period (rare in practice).

§1031 like-kind exchange applies to real property; cross-border §1031 exchanges between U.S. property and foreign property are not like-kind under §1031(h). Within-foreign-jurisdiction exchanges of foreign real property by a U.S. person can qualify.

Sale of a U.S.-located private island follows ordinary U.S. real-property rules.

Gift and estate

Foreign real property owned by a U.S. domiciliary is included in the U.S. gross estate under §2031 at fair market value. The location is irrelevant to U.S. estate-tax inclusion. Foreign jurisdiction may impose its own inheritance or transfer tax; many treaties (the U.S. estate-tax treaty network) mitigate double taxation. The U.S. owner of a Bahamian island, on death, may face U.S. federal estate tax plus Bahamian stamp duty; the U.S. owner of a French island faces U.S. federal estate tax plus French inheritance tax, mitigated by the U.S.-France estate-tax treaty.

Foreign owners of U.S.-located private islands face FIRPTA on disposition and estate inclusion under the $60,000 estate-tax threshold applicable to nonresident aliens (subject to treaty modification).

Common structures

• Personal ownership. Simplest, but exposes the U.S. owner to direct foreign-jurisdiction enforcement.
• Foreign holding company. Local corporate ownership, often required by foreign jurisdiction for non-citizen ownership; creates U.S. controlled-foreign-corporation (§957) or passive-foreign-investment-company (§1297) questions.
• U.S. LLC owning foreign property. A U.S. holding LLC owns the foreign property directly. May satisfy U.S. tax efficiency but conflict with foreign-jurisdiction requirements.
• Trust ownership. Dynasty trust or family trust holding the property for long-term family use.
• Charter business. Operational island-resort or destination-charter business.

Audit and enforcement landscape

U.S. tax-information-reporting compliance is the dominant federal enforcement concern. Failure to file Form 8938 for the indirect holding of foreign real estate through a foreign entity exposes the U.S. owner to substantial penalties under §6038D. FBAR exposure exists where local-jurisdiction bank accounts are maintained for the island operation. See FBAR and FATCA / Form 8938.

Pandora and Panama Papers disclosures highlighted offshore real-estate-holding structures, with subsequent enforcement attention from multiple national authorities. See Pandora and Panama Papers.

Jurisdictional notes

• Bahamas. Permitted foreign ownership; no income or capital-gain tax; stamp duty on conveyance; ongoing real property tax.
• British Virgin Islands. Non-belonger land-holding license required; 12% non-belonger duty on acquisition.
• Greece, Croatia, Italy. EU member-state islands; subject to local property and inheritance tax regimes; cultural-property heritage restrictions.
• Canada. Cottage-country islands subject to provincial transfer taxes and (some provinces) annual non-resident speculation taxes.
• Fiji, Vanuatu, French Polynesia. South Pacific markets; varied foreign-ownership and tax regimes.
• U.S. states. Domestic islands subject to ordinary U.S. and state real-property tax.

Reviewed May 2026