What Foreign Nationals Investing in Rental Property Need to Know
While the fundamentals of investing in Sarasota, Bradenton, Venice, and North Port, FL area residential rental properties are the same no matter the nationality of the investor, there is one consideration that many foreign national investors seem to overlook—taxation. The purpose of this article is to give a general overview of the issue, not specific legal and/or tax advice. You are encouraged to retain competent legal counsel with respect to matters discussed in this article—tax laws change, and you are responsible for retaining professional representation with respect to matters discussed herein.
Tax on Income from Rental Property
U.S. tax law is quite clear in that anybody who derives income from U.S. based residential rental property is subject to taxation under the tax laws of the United States. Residential rental property can include single-family houses, multi-unit apartments, condominiums, and mobile homes. While most U.S. citizens take the fact of taxation for granted, many foreign nationals are not aware of their tax obligations under the U.S. tax code.
Taxation of Foreign Nationals—The HARD Way to Do It
Generally speaking, a non-U.S. person who rents out a U.S. residential property is subject to a 30% withholding tax on the gross amount of each rental payment (as of the date of this writing—consult your tax adviser). As an example, each $1,000.00 of monthly rental income received is subject to a withholding of $300.00, which must be forwarded to the U.S. Internal Revenue Service. If the rent is being collected on the owner’s behalf by a property manager, that property manager must withhold the funds and forward them to the IRS. Withholding is not optional on the part of the manager—their hands are tied, and it must be done. Unless . . .
Good News—The BETTER Way to Do It
The good news is that there is a legal way to avoid the 30% withholding from ongoing rental payments. The following steps can be taken to remove the 30% withholding tax obligation:
- The non-U.S. property owner must agree to prepare a U.S. tax return the year after the income is received. They must declare the U.S. rental income and pay any tax owed if any.
- The foreign owner of U.S. rental property must obtain a U.S. “Individual Taxpayer ID Number” (ITIN).
- The foreign owner of U.S. Rental property must complete IRS Form W-8ECI.
Understand that the non-U.S. property owner may claim the same deductions as a citizen rental owner—mortgage payments, repairs, maintenance, management fees, etc. In practice, it is not unusual for a foreign rental property owner to owe little or no U.S. income tax on their rental property. This is why it is so vitally important to obtain an ITIN, complete IRS Form W-8ECI, and prepare and file a tax return annually. Failure to do so automatically triggers the 30% withholding requirement (NOTE: A new IRS Form W-8ECI should be completed every three years).
Conclusion
Unless a few simple steps are taken upfront to legally avoid mandatory withholding, non-U.S. persons renting out U.S. residential property are subject to a 30% withholding tax on the gross rental income. By obtaining an ITIN, completing an IRS Form W-8ECI, and agreeing to file an annual tax return, the non-U.S. property owner may avoid the withholding entirely, and given their deductions may minimize, or entirely avoid taxation on their U.S. rental income.
About the Author
John Michailidis, JD, is the Broker/Managing-Member of Real Property Management of Sarasota & Manatee, a Sarasota, FL based residential property management company catering to many foreign national, U.S. rental property owners. Real Property Management of Sarasota & Manatee provides both Full-Service and Lease-Only services to Sarasota, Bradenton, Venice, and North Port area landlords. If you own residential investment real estate anywhere in Manatee or Sarasota counties, do feel free to reach out to our team at 941-216-0005, or through our website.