US income tax on rental property for nonresident landlords

Last Updated on September 16, 2024 by Kristina Valcheva

Income tax on rental property 

Many overseas investors are intrigued by the idea of buying investment property in the US. And it’s no surprise.

Despite the pandemic, after eight years of steady house price increases, the housing boom in the United States continues. 

• • In this guide:
    • Do foreigners pay income tax on rental property in the US?
    • When do you have to pay income tax on rental property? What counts as rental income?
    • What are the tax requirements for rental income from US property?
    • Does a US nonresident alien have to file a tax return for rental income?
    • Am I a resident or nonresident alien for tax purposes in the US?
    • What rental expenses are deductible in the US?
    • How can depreciation lower income tax on rental property?
    • What tax form does a nonresident alien file?
    • How can nonresident landlords pay less tax in the US?
    • When is the US tax deadline?
    • What happens if I miss the US tax deadline?
    • Who can help me file my US nonresident landlord tax return?
    • Who are we?

A lot of British residents are buying property in Florida and that’s a popular trend right now.

A buy-to-let can generate a substantial, ongoing cash flow, and it’s an excellent retirement investment they say. It sounds awesome, and it can be, but did you know you can also save money come US tax time?

If you own a rental property in the US, it’s important to remember that you will have a tax filing requirement.

The nonresident income tax on rental property in the US can be confusing, and taxpayers frequently struggle to comprehend their tax obligations, and how to avoid fines.

US tax on rental income for nonresidents gets even more complicated because you must address both the US rental income tax and your own country’s tax rules.

With this in mind, you may be asking yourself what are the tax obligations of nonresidents with rental income in the US. Do foreign investors pay tax on rental income? Or who can help you file US landlord tax return?

In this guide, we will cover what a nonresident landlord must know about the rental income tax in the US.

Do foreigners pay income tax on rental property in the US?

Yes. Let’s dive deeper into the rental income tax for nonresidents.

A nonresident who is receiving rental income from US real property is generally subject to a 30% withholding tax applied on the gross amount of each rental payment.

Tax audits and fines may be incurred if the required papers are not filed and taxes are not paid on this income.

But there is a way to reduce the amount of income tax you are required to pay (more on this later).

When do you have to pay income tax on rental property? What counts as rental income?

When it comes to your rental income and taxes, this counts as rental income:

• Advance Rent Payments: If your tenant pays rent ahead of time, like the first and last month’s rent, that’s counted as income.
• Monthly Rent: Of course, the regular monthly rent is rental income.
• Security Deposits: Deposits meant for damage coverage aren’t income, but any portion you keep as payment counts.
• Lease Cancellation Fees: If tenants pay to cancel a lease, that money is rental income.
• Property or Services Instead of Rent: If you waive your tenant’s monthly rent payment for something like a fence installation, its value is rental income.
• Tenant-Paid Owner Expenses: If tenants pay expenses they’re not responsible for, that’s income for you.
• Partial Ownership: If you own only part of the property, report your share of the rental income.
• Lease with Option to Buy: All payments from tenants with the option to buy are considered rental income.

What are the tax requirements for rental income from US property?

When a nonresident alien buys property located in the US, usually there is no initial obligation to pay taxes or file any forms with the IRS.

This changes, as soon as there is any rental income.

The IRS considers any property you own and rent out for at least 15 days each year as a rental property. Rental property, according to the IRS, can be a single house, apartment, condo, mobile home, vacation home, or a similar place to live.

The tax rate on this income depends on whether this is considered effectively connected income (ECI) that is associated with a US business/ trade, or passive income (also known as FDAP income).

FDAP income is typically taxed at a rate of 30% of a rental property’s gross income. This is the default option. If the landlord chooses this option he/she will pay much more and should provide the tenant with Form W-8BEN.

On the other hand, ECI is taxed at progressive rates based on the net income earned after expenses and deductions are applied.

This is also the smarter choice because you will be taxed at the standard graduated rates that apply to residents and citizens of the US.

Read more:
What Europeans need to know about tax if owning a property in the US

Global rental income – A guide for American investors with overseas property

Does a US nonresident alien have to file a rental income tax return?

Each year that a nonresident landlord earns ECI from a US rental property, he or she must file a rental income tax return for nonresidents (Form 1040NR).

Failure to file a timely US nonresident tax return will result in a 30% tax rate being imposed on the property’s gross income of each rental payment, with no option to claim any deductions or credits.

This may not be beneficial at all if you have any tax deductions related to your US rental property. That’s why most landlords choose to report the rental income on a US tax return – 1040NR (nonresident alien tax return) by attaching a formal election statement to it.

This election will remain valid in the next tax years unless the taxpayer decides to suspend it. Unlike the first option, all property-related expenses are deductible here.

That’s why it’s a good idea to keep all of your receipts and payment documents in case of an IRS audit.

So, if the US property owners decide to prepare a nonresident alien tax return and take into account all of the available deductions, they may not have taxable income left, and they will no longer be obligated to have 30% withheld from each rental payment.

That’s how you can save from taxes.

Got questions? Request a free callback from a tax expert.

Am I a resident or nonresident alien for tax purposes in the US?

It’s essential to determine your residency in the US so that you can file a tax return under the correct status and pay the right amount of taxes.

You may qualify as a resident alien if you are a citizen of another country who lives and works in the US. There are two ways to qualify as a resident alien in the United States and this is described in IRS publication 519:

• • • You pass the substantial presence test
    • You past the Green card test

If you don’t fulfill the criteria to be a resident alien, you may be classified as a nonresident alien.

A nonresident alien is someone who is legally in the US for a limited period or does not have a green card. The main distinction between the two is in the paperwork and the taxation of the income.

If you qualify as a resident alien, you will owe taxes on your worldwide income. A nonresident alien owes taxes only on income from US sources.

Sometimes, you can even be considered a dual-status alien. This means you are both a resident and nonresident alien.

This is usually in the year you depart or arrive in the US. If you are a foreign landlord in the US, PTI Returns tax experts can help you determine your residency status, file your tax return with all the applicable deductions, and answer your questions.

What rental expenses are deductible in the US?

Yes, you can deduct your expenses from the income tax on your rental property in the year in which they are incurred.

As a non-US landlord, you can take advantage of plenty of deductions.

Some of the most common rental expenses that you can deduct in the US are:

• • • Travel / Auto expenses
    • Maintenance and cleaning costs
    • Repairs
    • Mortgages
    • Mortgage interest
    • Commissions
    • Advertising costs
    • Utilities
    • Property manager expenses
    • Insurance
    • Legal and other professional fees
    • Utilities
    • Real property taxes
    • Depreciation expense
    • Other costs specific to your rental

How can depreciation lower income tax on rental property?

Depreciation is a tax benefit that’s quite valuable for real estate investors. It allows you to subtract the cost of buying and improving a rental property over time. This reduces the amount of income you have to pay taxes on.

As an investor, you can spread out the deduction for buying and improving a rental property over 27.5 years for residential properties or 39 years for commercial ones, which is how long the IRS thinks these properties stay useful.

Here’s how it works for residential properties:

• Figure out the property’s cost basis, which includes what you paid, borrowed, and spent on repairs.
• Don’t include the cost of the land – you can’t depreciate that.
• If you use straight-line depreciation, you evenly divide the cost basis over 27.5 years.

For instance, if your property’s cost basis is $100,000, you can deduct $3,636 each year. But remember, you can only start this deduction once the property is in use, and it’s spread out monthly.

Depreciation can help lower your yearly tax bill, but keep in mind that when you sell the property, the IRS might want some of those tax savings back. They call this “depreciation recapture.”

If you’re interested in using this tax deduction, and if you have questions, you can request a free callback from a tax professional.

What tax form does a nonresident alien file?

As we discussed, If you are classified as a nonresident alien for tax purposes, you should report your US rental income on Form 1040NR Nonresident Alien Income Tax Return.

How can nonresident landlords pay less tax in the US?

The good news is, as mentioned above the entire 30% withholding tax obligation can be removed. How?

As we explained, the nonresident homeowner can save from taxes by filing a US income property tax return and including all the applicable property-related expenses.

To avoid paying the 30% withholding tax, a US nonresident property owner must take the following simple steps:

• • 1. Prepare a US property tax return the year after the rental revenue is received.
    2. Apply for an ITIN number if they plan to sell the real estate in the current year or to receive a rental income and if they do not have a Social Security Number (SSN). File Form W-7 to get ITIN.
    3. Submit Form W-8ECI to the rental agent or the tenant

PTI Returns can assist you through the whole process.

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When is the US tax deadline?

The regular due date for American residents to submit their Federal Tax Returns for the tax year 2023 is April 15, 2024.

However, for US individuals residing outside the country (nonresidents), the deadline is automatically extended by two months to June 16, 2024.

What happens if I miss the US tax deadline?

To avoid potential issues with the IRS, it’s best to meet the US tax deadline.

Many people make the mistake of requesting an extension because they are unable to pay their taxes. This method can result in penalties and interest payments.

As a nonresident with rental property, you should know that failure to follow the IRS tax rules can lead to a lien (claim) being placed on your US real estate.

Who can help me file my US nonresident income tax return?

Are you looking for property tax advisors? 

PTI Returns’ tax experts will help you file your US income tax return online if you are earning income from a rental property and this will save you time and stress.

Our team will determine what’s the most profitable way of reporting this income, ensuring that you meet your tax requirements and avoid fines. We can also assist you in getting your ITIN.

We provide services for residents and nonresidents. 

Who are we?

Property Tax International (PTI Returns) makes life easier for foreign landlords who own property in another country and we aim to remove the hassle of dealing with taxes.

We understand that filing US taxes while living abroad might be complicated, but we believe it does not have to be that way.

PTI Returns is part of CluneTech ( formerly known as Taxback Group), employing over 1,500 people in more than 20 countries worldwide.

We have more than 25 years of experience in international tax and our tax experts will keep you compliant with the IRS.

If you have any questions that we did not answer, you can request a free callback from our tax experts at +353 1 635 3722.

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Got questions? Request a free callback from a tax expert.