Nonresident Alien Rental Income from U.S. Property

Nonresident Alien Rental Income from U.S. Property

Nonresident Alien Rental Income from U.S. Property: It is very common for nonresidents outside of the United States to purchase real estate rental property in the United States as an investment. Depending on the state of the market and current exchange rates, purchasing and renting out real estate by nonresident aliens can be a very lucrative investment opportunity.  Since many of the nonresident aliens do not have any other income in the U.S., they oftentimes do not file tax returns with the IRS.

Likewise, the renter is unaware that the owner is a nonresident, therefore they are not withholding any rent money — and the NRA has not properly filed U.S. tax returns and made the election to treat the otherwise rental income FDAP as ECI.

Nonresident Alien Rental Income from U.S. Property Compliance Group

In October, the IRS announced a new international tax compliance enforcement campaign for rental property:

Practice Area: Withholding and International Individual Compliance

Lead Executive: Deborah Palacheck, Director of Withholding & International Individual Compliance

Campaign Point of Contact: Ursula Gee

Nonresident aliens who receive rental income from U.S. real property must comply with all tax reporting and filing requirements. This campaign will address noncompliance through examinations, education, and outreach.”

Here  are four (4) reasons why the IRS launched the nonresident alien with rental income from US property enforcement compliance group.

Failure to Report Income

Even though nonresident aliens reside outside of the United States, the U.S. rental income they earn from rental property located within the U.S. is still taxable by the U.S. government.

In other words, rental income in the U.S. is not tax exempt, even when the owner resides outside of the U.S. is not otherwise subject to U.S. tax laws.

Failure to Withhold 30% by the Renter

Most renters would have no idea that they are required to withhold 30% of the rent paid to a foreign seller and direct that money to the IRS.

Why would they, right?

They tenant is literally just renting someone’s home or other property, and what do they care if the owner is a nonresident alien —

Since most renters do not withhold the money, and most NRAs do not properly file U.S. tax returns and make the necessary election to treat the otherwise rental income FDAP as ECI — the IRS rarely receives adequate tax payments on the income generated from nonresident owned U.S. property.

Foreign Cash Buyers Generate Significant Income

Many nonresident aliens who purchase rental property in the United States, purchase it for cash.

As a result, even if there are some expenses to deduct from income, oftentimes it will net a profit – especially if there are multiple properties.

Therefore, the Internal Revenue Service is missing out on a significant amount of income.

Future Sale of the Property

At some point in the future, when the foreign owner sells the property, they will be subject to FIRPTA.

With FIRPTA, the withholding agent must retain 15% of the sale price (not profit), which is then diverted to the IRS pending the filing of a tax return — or unless a withholding certificate was obtained. 

By having the renter properly withhold the rent and submitting it to the IRS, the IRS is on notice of the properties owned by foreign nonresident aliens, and can take action accordingly.

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