U.S. Non-Resident Owners of U.S. Rental Property – The Basics
Many people outside the U.S. look at U.S. real estate as an investment opportunity. They will purchase a house, rent it out to pay the mortgage, and then sell it after the property has (hopefully) appreciated, reaping their gains. While a fairly simple proposition, it comes with a slew of reporting requirements and regulations that potential investors should consider.
A U.S. Tax Return Is Most Likely Required For The U.S. Rental Property
As soon as a U.S. property owned by a U.S. non-resident is rented out, a couple different issues arise. Firstly, either the tenant or the property manager (acting as a U.S. withholding agent) would withhold 30% of the gross rent paid and remit it to the IRS. A U.S. tax return would need to be filed to receive a refund of any of the 30% withholdings. If the property is only rented for 14 days or fewer in the year, a tax return is not required, but withholdings still might be under U.S. withholding tax rules.
If the proper forms are filed and elections made, the 30% withholding on gross rental income may be waived, and tax will only be assessed on the net rental income of the property. In this case a yearly tax return is required. U.S. non-resident owners of U.S. rental property almost always choose to file a U.S. tax return for another reason; to carry forward any rental losses incurred to future years. Doing this allows the taxpayer to offset any net rental income with prior year losses, and most importantly, to offset potential capital gain that may occur when the property is sold.
State Tax Returns May Also Be Required
There are only 7 states in the U.S. that do not have an income tax. As a result there is a very good chance that a state tax return will be required in addition to the federal. Each state comes with their own rules and regulations that must be followed, so it is important to engage with a tax professional to make sure all of the various requirements are met.
The Individual Taxpayer Identification Number (ITIN)
Most likely then the U.S. non-resident owner of the U.S. rental property will have to file a tax return. To do this they will need an ITIN. The ITIN application form must be filed with a U.S. tax return, along with approved supporting documentation. Most common types of supporting documents include original passports, certified copies of passports, or combinations of foreign identification and other official documents. It should be highlighted that a notarized copy of a passport is not the same as a certified copy of a passport. Only the agency that originally issued the passport or a Certified Acceptance Agent has the ability to certify the copy for ITIN application purposes.
U.S. Rental Property – A Potentially Complicated Area
Please be aware that we have only touched on a small portion of the actual law in this post, and that the rules will probably vary depending on taxpayer’s individual facts and circumstances. Check back for more posts that delve into the specific workings of U.S. rental properties, and remember to engage with a tax professional regarding your specific situation.
Owner Of A U.S. Rental Property?
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Any tax advice herein is based on the facts provided to us and on our interpretation of tax legislation as it reads at the time the advice is provided. Tax law is subject to continual change, at times on a retroactive basis and may result in incremental taxes, interest or penalties. We are not responsible for updating our advice for changes in law or interpretation after the date the advice is provided. Every tax situation is different. We are not responsible for the tax implications to any individual or entity that may act on this advice.