Saturday, February 8, 2014

Non Resident Aliens and U.S. Rental Property

Arizona is a popular state for NRA's to buy and rental property.  The number is increasing and I have seen this in my own Ahwatukee neighborhood.   

Rental income from real property located in the U.S. will always be U.S. source income (as well as any gain when you sell it).
There are 2 methods that the NRA can choose.  
  • If the NRA elects to treat the income as Investment Income, they need complete a W-8BEN and use the Gross Method
    • Under this method, 30% of each rent payment needs to withheld by the management company or the tenant and remitted to the IRS.  The NRA will not have to file a 1040NR, if they don't have any other U.S. income.  But, likewise, they will not receive any refund of tax that was withheld.
  • If the NRA chooses to treat the property and income as effectively connect to a U.S. trade or businessw, they complete a W-8ECI and use the Net Method. 
    • The 30% tax withholding is not required by the property manager or tenant, but the NRA may have to make estimated quarterly payments.  They will file a 1040NR and report the rental income & expense on Schedule E.  Net income would be determined for each property and will be taxed the same as for a U.S. citizen.  
    • Once this method is elected, you cannot change it without permission from the IRS
Tax Preparers may not have a NRA client, but they may have real estate agents or property managers that could be subject to withholding tax for their NRA clients.

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