Last Updated on January 8, 2024 by Kristina Valcheva
This article was reviewed by a tax professional.
9 things Europeans with property in the US need to know about tax
It’s hard enough to come to terms with tax in your own country without having to understand the tax rules and regulations in the USA as well.
But if you own a rental property in the US, it is very important that you have a strong grasp of your tax obligations and entitlements.
Ultimately, this will help you to make the most of your investment.
The challenge is that nonresidents with US rental property often face a more complex tax situation.
What’s more, it’s crucial to stay on the taxman’s good side so that you can avoid fines and penalties.
In this guide, we are going to outline everything nonresidents need to know about tax if they own a property in the USA.
What are the tax implications of owning a property in the USA?
1. Tax implications based on how you use your US property
It’s important how you use your US home. Here are some common ways that foreigners make use of their homes in the U.S.
-
Vacation rental
If you’re planning to rent out your home for more than 14 days per year, the US federal government requires you to report your rental income or loss annually. If you purchased the property under your name, you’ll need to file using Form 1040NR. If you bought it under a business entity, you’ll use Form 1120-F for reporting.
-
Living in the property
If you live in your home in the US for more than 121 days, the IRS deems you a resident for income tax purposes based on the Substantial Presence Test. As a result, you will be obligated to pay taxes on your income from around the world. This may not be an ideal scenario.
However, you can avoid being taxed twice if your home country has a Tax Treaty with the US.
To get more information about taxation, you can consult with our tax advisors.
-
Periodic personal use
If you’re buying a home in the United States for personal vacations, and you visit a few times a year (less than 121 days), you won’t have to file a rental tax return or report your worldwide income. However, you’ll still be responsible for paying property taxes, homeowners insurance, and other routine fees.
In short:
All homeowners in the United States, regardless of residency status, are required to pay annual property taxes. Additional fees are involved in the home-buying process, including both one-time and recurring charges like property taxes.
The tax implications on rental income depend on how you use your property. If you intend to spend more than one-third of the year in the US, you may face potential double taxation.
As a precaution, it is advisable to seek advice from a tax professional before proceeding with the purchase of a home in the US.
Read more:
Understanding Income Tax and Foreign Rental Property Depreciation: A Guide for American Investors
2. Foreign Investment in Real Property Tax Act of 1980 (FIRPTA)
FIRPTA is a tax imposed on nonresidents who sell property in the US.
In such transactions, the foreign person (the buyer) is responsible for withholding 15% of the sale proceeds and submitting this amount to the IRS. This is not an additional tax, it is simply a withholding. This is required so that the government can ensure that the tax liability for the property is paid. Afterwards, the amount is refunded once the taxes on the property are up to date.
Fortunately, with good business structuring, foreign investors are able to avoid FIRPTA real estate tax which will help them to reduce their overall tax burden. If a foreign property owner obtains a Withholding Certificate, he/ she may reduce FIRPTA withholding at the time of sale.
3. Tax rates
The Internal Revenue Service (IRS) requires all foreigners to pay US income tax on any revenue from US sources. Unless reduced by an applicable tax treaty, rental income is subject to a flat 30% withholding tax.
4. You can choose how your property income is treated
As a nonresident US property owner, you can choose to treat all income from this real estate as income connected with a business or trade in the US. Depending on the choice that you make, there may be a number of tax deductions that you can claim in order to reduce your overall tax bill.
Check our tax filing solutions
5. Elections to make
The income of a non-resident alien, that is subject to US income tax, can be divided into two categories:
- income which is effectively connected with a business or trade in the US
- income which is not effectively connected with a business or trade in the US
Effectively connected income is taxed at graduated rates with deductions allowed whereas income that is not effectively connected with a trade or business is taxed at a flat 30% rate.
To mitigate the 30% gross income withholding tax, non-resident landlords are able to make an election that relieves the income payer from the obligation to withhold the flat 30% tax on gross income and allows the non-resident landlord to file an annual return and tax the rental income (net of expenses).
You can make this election by attaching a formal election statement to your Form 1040NR tax return.
Whether or not you elect to determine your income as connected with a business or trade in the US, can make a big difference to your tax liability.
For instance, if the gross income from a rental property is $100,000 (without the election), the income tax would be $30,000 (30% of $100,000). With the election, some deductions like mortgage interest and property tax, etc. would reduce the taxable income and the tax payable would be 30% of the net amount.
6. What is a tax treaty?
The US has tax treaties with 66 countries. These treaties allow foreigners to pay less tax or be exempted from taxes on certain items.
If you are entitled to tax treaty benefits, you may be able to reduce your tax bill. Exactly how much you can claim will depend on the agreement the US has signed with your country.
Got questions? You can request a free call back from a tax professional.
7. Gains impact the taxation
When a nonresident in the US sells real estate, any gain is taxed as if the property had been sold by a US resident or citizen. Therefore the gain may qualify for lower long-term capital gains treatment if the property has been held for more than 12 months.
8. Withholding tax
You will be subject to a 15% non-resident withholding tax on the gross sales proceeds of the transaction – unless you are exempt from the withholding.
To get a certificate of exemption (Form 8288-B Application for Withholding Certificate for Dispositions by Foreign Persons of US Real Property Interests) a petition for exemption would need to be filed with the IRS in advance of the sale date.
9. Income tax on rental property for non-residents in the US
If you’re earning income from your US rental investment, you will be liable to pay tax on rental income.
Nonresidents who are US property owners are required to file an annual rental income tax return (Form 1040NR) and must obtain a US Taxpayer Identification Number (TIN) before filing.
As a landlord, you can take advantage of several tax deductions.
The key is to be organized throughout the year, so you can claim every expense you are entitled to. Keep in mind that, if you are audited, the IRS will want to see evidence for every deduction that you take.
The regular due date for American residents to submit their Federal Tax Returns for the tax year 2022 is April 18, 2023, but since the 15th falls on a Saturday, the deadline is pushed to the next business day.
However, for US individuals residing outside the country (nonresident property owners), the deadline is automatically extended by two months to June 15, 2023.
Owning real estate is a great way to generate consistent passive income, but preparing your personal or business US tax return can be very perplexing.
Who can help?
Our tax advisors can help you manage your tax liabilities correctly, avail of double taxation agreements, and ensure you’re not taxed on the same income more than once.
At Property Tax International (PTI Returns) our team of tax experts specializes in property income tax returns for overseas real estate investors.
We will keep you updated throughout the process and communicate directly with the American tax office on your behalf.
Why choose PTI Returns?
PTI Returns is part of CluneTech (formerly known as Taxback Group), a global organization with a workforce of over 1,500 professionals spread across 20 countries.
With our extensive 25 years of experience in international tax, our team of expert professionals will ensure your complete compliance with the tax authorities in both jurisdictions, leaving you with peace of mind.
- We offer online tax filing for rental property owners
- Our team of tax experts can answer any of your US property tax-related questions.
- We filed over 322,000 tax returns last year.
Read also: