Foreign Owners Earning Rental Income From US Real Estate
US Taxation of Rental Income Generally
As a general rule, a non-US person who rents out his or her US home is subject to a 30% withholding tax imposed on the gross amount of each rental payment. This means if a foreign person owns an Irvine, California house, and rents it out for $2,000 a month, $600 of each $2,000 monthly rent payment payable to the foreign owner must instead be sent directly into the IRS (and not sent to the non-US owner). Who is responsible for sending in the 30% of the gross rents tax into the IRS? The foreign owner, the US property manager (i.e., anybody who collects the rent payment for the foreign owner) and even the tenant, are all responsible to send the 30% tax into the IRS. The IRS can go after any of the parties (tenant, property manager and foreign owner) who fail to send in the 30% of the gross rental payments tax. A non-US owner earning rental income from US real estate (and not having 30% sent into the IRS) is liable to the IRS for the failure to have the withholding on their rental income, unless they follow the steps outlined below. For the non-US owner of US real estate, failure to follow the proper IRS tax rules can lead to a lien being placed on their US real estate, and can even negatively impact their US immigration rights.
But the Entire 30% Withholding Tax Obligation Can Be Easily Removed
The foreign owner earning rental income can easily have the 30% withholding obligation removed. How? The foreign owner must follow this simple formula to remove the 30% withholding tax obligation:
- The foreign owner must prepare a US tax return the year after the rental income is earned. The owner must declare the US rental income, and pay the appropriate tax (if any). But will they actually owe any tax? In many cases the answer is no. The foreign owner must only pay tax on the net rental income on the US tax return, which means the non-US owner can take plenty of deductions (common deductions in renting a property include interest deductions for mortgages, advertising costs, cleaning costs, property manager costs, and many others). The end result could easily be that the foreign owner pays zero tax (or very little tax). In our example of the foreign person who owns an Irvine house and earns $2,000 in rental income each month, it is extremely common that this foreign owner, after preparing a US tax return, would owe $0 tax to the IRS and would no longer be required to have 30% withheld from each rental payment.
- The non-US owner must obtain a US Individual Taxpayer ID Number (an “ITIN”), if one has not already been obtained.
- Finally the non-US owner must complete the IRS Form W-8ECI. The IRS Form W-8ECI is not completed unless the foreign owner obtains an ITIN. A new IRS Form W-8ECI should be completed every 3 years.
By obtaining an ITIN and completing an IRS Form W-8ECI, the foreign owner of the Irvine house who collects $2,000 a month has effectively made a deal with the IRS: the IRS removes the 30% of the gross rental payments withholding tax requirement if the foreign owner prepares a US tax return every year to declare the US rental income. So the foreign owner no longer must have 30% of each rental payment withheld each year, but they must file a tax return. After the owner takes the allowable deductions (including, for example, mortgage interest, homeowner’s association fees, and repairs and maintenance), it is very possible (and common) that the foreign owner will owe $0 tax.
DIRECTS can assist foreign owners of US real estate, and US property managers of foreign owners of US real estate, properly report and pay tax (if any) on US rental income.