Foreign Owners Earning Rental Income
As a non-US resident who is interested in owning rental property in the United States, you may be a bit apprehensive about making such an investment. After all, according to the US Tax Code, foreign owners of US property must pay a 30 percent withholding tax on all rent received from a property. Therefore, if you are renting your property at a rate of $1000 per month, $300 of that must be sent directly to the IRS. Fortunately, there are ways to work around this tax so you don’t have to worry about losing so much of your profit.
Removing the 30% Withholding Obligation
To remove the 30% withholding obligation, you need to follow this simple procedure:
- Prepare a US tax return the year after earning your rental income. Declare the rental income and pay the required tax. Since you have to pay taxes on your net rental income, you may not actually owe any tax because after you make your deductions. Common deductions taken on the rental property include mortgage, cleaning costs, advertising costs and property manager costs). After making all of the allowable deductions, you may not have any taxable profit, which means you do not have to worry about the 30 percent withholding tax at all.
- Obtain a US Individual Taxpayer ID Number (ITIN) if you have not already obtained one.
- Complete Form W-8ECI, which effectively serves as an agreement between you and the IRS to remove the 30 percent withholding tax if you prepare a US tax return every year and declare your rental income. You will need to complete the W-8ECI every three years.
To ensure you are able to take advantage of all of the deductions that are available to you, you need to be sure to file your taxes on time each year.
Selling US Real Estate as Foreign Investor
If you later decide to sell your rental property, you will be required to pay capital gains as well as taxes as required by FIRTPA. FIRTPA, or Foreign Investment in Real Estate Property Tax Act, is an act that requires the buyer to withhold tax from a foreign seller in the amount of ten percent of the gross process from the property sale. If you have no outstanding US tax liability, however, you will receive a refund of the funds withheld by FIRPTA. This gives you even more of an incentive to file taxes each year on your rental property income, so you are not hit by additional taxes at a later date when and if you decide to sell.
Choosing the Right Acquisition Structure
Your acquisition structure, which may be domestic, LLC, trust or corporation, can also have an effect on the overall tax burden you have with your rental income. Since choosing the most tax-efficient acquisition structure depends upon a variety of different factors, it is a good idea to consult with a CPA who specializes in non-resident tax issues in order to select the structure that is best for you.