FOREIGN OWNERS EARNING RENT FROM US REAL ESTATE

In general, rental income in the United States is taxed.

In general, a non-resident alien who leases out his or her US residence is liable to a 30% withholding tax on the gross amount of each rental payment. This implies that if a foreign individual buys a property in Irvine, California and leases it out for $2,000 per month, $600 of each $2,000 monthly rent payment made to the foreign owner must instead be sent straight into the IRS (and not sent to the non-US owner). Who is responsible for submitting the 30% gross rentals tax to the IRS?

The foreign owner, the US property manager (i.e., anybody who collects rent for the foreign owner), and even the renter are all required to pay the 30% tax to the IRS. The IRS can pursue any of the parties (tenant, property manager, and foreign owner) who fail to pay the 30% tax on gross rental payments.

A non-US owner who earns rental income from US real estate but does not have 30% withheld by the IRS is responsible to the IRS for the failure to withhold 30% of their rental revenue unless they complete the requirements listed below. Failure to follow the required IRS tax requirements can result in a lien being put on a non-US owner's US real estate, as well as a negative influence on their US immigration status.

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However, the entire 30% withholding tax obligation can be easily eliminated.

The foreign owner who earns rental revenue can easily avoid the 30% withholding duty. How? To avoid the 30% withholding tax, the foreign owner must apply this simple formula:

1. The foreign owner is required to file a US tax return the year following the rental revenue is earned. The owner must disclose and pay the relevant tax on the US rental revenue (if any). But will they have to pay any taxes? Many times, the answer is no. On the US tax return, the foreign owner must only pay tax on the net rental income, which implies the non-US owner can claim several deductions (common deductions in renting a property include interest deductions for mortgages, advertising costs, cleaning costs, property manager costs, and many others). As a result, the foreign owner may wind up paying no tax (or very little tax). In our example of the foreign individual who owns an Irvine property and gets $2,000 in rental revenue each month, it is highly frequent that after submitting a US tax return, this foreign owner would owe $0 tax to the IRS and would no longer be needed to have 30% withheld from each rental payment.
2. If one has not previously been obtained, the non-US owner must get a US Individual Taxpayer ID Number (an "ITIN").
3. Finally, the non-US owner must submit IRS Form W-8ECI. Unless the foreign owner receives an ITIN, the IRS Form W-8ECI is not completed. Every three years, a new IRS Form W-8ECI should be completed.

The foreign owner of the Irvine house who collects $2,000 per month has effectively made a deal with the IRS by obtaining an ITIN and completing an IRS Form W-8ECI: the IRS removes the 30 percent of gross rental payments withholding tax requirement if the foreign owner prepares a US tax return every year to declare the US rental income. As a result, the foreign owner is no longer required to have 30% of each rental payment withheld each year, but still must file a tax report. After deducting all permitted expenses (such as mortgage interest, homeowner's association fees, and repairs and upkeep), the foreign owner is quite likely (and frequent) to owe no tax.

DIRECTS can help foreign owners of US real estate, as well as US property managers for foreign owners of US real estate, correctly report and pay US rental income tax (if applicable).