Rental Income Tax

In general, there are no restrictions placed on people from outside the US buying property.

Тhese are the costs you need to know about:

• Title insurance – this is a contractual obligation that protects against losses that occur when the title to a property is not free and clear of defects (e.g. liens, encumbrances, and defects that were unknown when the title policy was issued). The terms of the policy define what risks are covered and what risks are excluded from coverage. The title insurer will reimburse you for losses that are covered, up to the face amount of the policy, and any related legal expenses. This protection is effective as of the issue date of the policy and covers defects arising prior to your ownership. Title companies issue policies on all types of real and personal property.
• Broker commissions – real estate transactions that involve a broker are usually subject to a commission that typically varies between 3% and 6% of the property purchase price; however, oftentimes the commission is incurred by the seller.

Non-citizens in the US are classified as nonresident aliens and resident aliens. If someone is an alien (not a US citizen), they are considered a nonresident alien unless he/she meets one of the two tests:

• Green card test – A person is a resident for tax purposes if they are a lawful permanent resident of the United States at any time during the calendar year. This is known as the “green card” test.
• Substantial presence test – A person will be considered a US resident for tax purposes if he meets the substantial presence test for the calendar year. To meet this test, they must be physically present in the United States on at least 31 days during the current year, and 183 days during the 3-year period that includes the current year and the 2 years immediately before that.

Resident aliens generally are taxed on their worldwide income, the same as US citizens. They need to file an annual return and report the rental income received. Rental expenses are permitted to offset rental income, and the net rental income is taxed at graduated rates.

Nonresidents who receive rental income from US-situated real property are generally taxed at 30% of the gross rental income. It is the tenant or the real estate management company (if there is one involved) that has a primary obligation to withhold the 30% tax before remitting the net amount to the nonresident landlord. A nonresident alien receiving rental income is not required to file an annual tax return for rental property to report the rental income as the 30% tax withheld satisfies the US tax liability. However, the US tax law permits a nonresident alien to make a special election as explained in the following section.

As a non-resident French unfurnished property owner you are obliged to file a French personal tax return. Income from land or unfurnished buildings is taxed on income received less allowable expenses. Non-resident French unfurnished property owners can benefit from a simplified scheme called Micro-Foncier. This method of taxation allows a notional deduction of 30% against your rental income when arriving at your French taxable income. Alternatively, you can opt out of this regime and file your French income tax on an actual receipts/costs basis.

In order to mitigate the 30% gross income withholding tax, the nonresident landlord is allowed to make an election under IRC Section 871(d) that relieves the income payor from the obligation to withhold 30% tax on gross income and at the same time allows the nonresident to file an annual return and tax the rental income on a net basis (net of expenses). This election is made by attaching a formal election statement to a timely filed tax return Form 1040NR.

For those who elect to tax rental income on a net basis, the US income tax rates vary and are applied on a sliding scale. This means that people who earn more income pay a higher percentage of their income in taxes. There are seven federal income tax brackets with rates ranging from 10% to 37%. State tax may be required in addition to the federal rate depending on the rules imposed by the state where the property is located.

If you do make an election under Section 871(d) and elect to tax your rental income on a net basis as explained above, there are a number of allowable expenses that can be offset against your rental income such as:

• Advertising
• Auto and travel
• Cleaning & maintenance
  Insurance
• Legal & professional fees
• Management fees (letting agency fees)
• Mortgage interests (exclude any capital element)
• Repairs
• Supplies
• Property taxes
• Utilities

The deadline for filing a tax return for rental property is 15 April (or the next business day if the 15th falls on a federal holiday or a weekend). There is an automatic extension given to resident aliens and US citizens living abroad who have until 15 June to file their US income tax return. The deadline for nonresidents is 15 June.

Nonresident aliens must apply for an Individual Taxpayer Identification Number (ITIN). An ITIN is a tax processing number, issued by the Internal Revenue Service (IRS). It is a nine-digit number beginning with the number “9”. The ITIN is only available to individuals who are required to have a taxpayer identification number for tax purposes but who do not have and are not eligible to obtain a social security number from the Social Security Administration (SSA). Practically, a nonresident alien may obtain an ITIN only if they receive or expect to receive taxable income from US sources.

In addition to obtaining an ITIN and making a formal election under IRC Section 871(d), you also need to provide your tenant or property manager with a fully completed and signed form W8-ECI. This form is required to relieve your tenant or property manager from the obligation to withhold 30% of the gross rental income remitted to you.