Property, Property management, Taxation, Vacation homes & real estate

Tax Obligations for Rental Properties Held by Foreign Investors


Tax Obligations for Rental Properties Held by Foreign Investors

Many international investors in US real estate are buying into the residential market, such as a vacation rental property to be used part-time and rented out when unoccupied, or a single-family home purchased strictly as an income-generating investment.

With respect to taxes owed on rental property income, there is one primary question that you will need to answer:

Is the property held primarily as a passive activity, or are you engaged in a US trade or business?

The IRS views those two situations very differently, with important implications for your tax situation.

If you find yourself in the first category—your renters are paying rent such that it covers your property taxes, repairs, insurance, and so forth—you should expect to pay a flat 30% withholding tax that is applied based on the gross income received, not the net income after expenses.

On the other hand, if you are “engaged in a US trade or business”—you are in the country as a nonimmigrant or on an F, J, M, or Q visa, you own and operate a business in the US that sells services, products, or merchandise, or you’re a member of a partnership that engages in business in the US—all sources of income, including that generated by rental properties, is considered to be “Effectively Connected Income”, or ECI. Your rental income, along with any other income you may have generated through your business endeavors in the US, is then taxed at ordinary progressive rates rather than at the flat 30% rate previously described.

For more information, please consult the IRS’ website: “Foreign Persons Receiving Rental Income from U.S. Real Property”.

Please note that your individual circumstances may vary. We strongly recommend that you consult with a knowledgeable tax professional and/or CPA with experience working with foreign investors, in order to have a detailed understanding of your specific situation with respect to taxes you may owe.

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