US residents are taxed on their worldwide income similar to US citizens. Non-resident aliens are taxed only on their income from sources within the United States. Depending on the type of income, they may need to submit a US tax return to declare this.
Owners of real estate in the US, who are classified as ‘non-resident aliens’ and who do not already hold a Social Security Number (SSN) must apply for a US ITIN number if they expect to receive rental income or if they plan to sell the property in the current year.
Non-resident aliens must pass one of the following two tests before they can be classified as US resident for tax purposes:
- The Green Card test
- The substantial presence test for the calendar year (January 1-December 31)
US Income Tax
A non-resident alien’s income that is subject to US income tax must be divided into two categories:
Income that is effectively connected with a trade or business in the US and
Income that is not effectively connected with a trade or business in the United States
‘Effectively connected income’ is taxed at graduated rates with deductions allowed whereas income which is not effectively connected with a trade or business is taxed at a flat 30% rate. This tax is withheld at source.
In order to mitigate the 30% gross income withholding tax, non-resident landlords can make an election under IRC Section 871(D) 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).
This election is made by attaching a formal election statement to tax return Form 1040NR.
US Tax Identification Number
The Internal Revenue Service (IRS) requires that all non-resident property owners have an Individual Taxpayer Identification Number (ITIN) if they they do not have a Social Security Number (SSN) for taxation purposes.
US Real Estate Taxes / US Property Taxes
US real estate taxes vary from state to state as each state has its own right to implement whatever rates it deems fair provided it does not interfere with the Federal Government.
Real estate taxes are often imposed on the value of the property. US property taxes are based on the fair market value of the property. US property tax rates have increased to mirror and exceed similar rates in other countries with some states exceeding 5%. In some states, it is permissible to separate the real estate tax, into two separate taxes – one for the land value and one for the building value.
Letting Property in the US
Generally, cash or the fair market value of property received for the use of real estate or personal property is taxable as rental income. Taxpayers can generally make an election to deduct expenses of renting property from their rental income.
US Capital Gains Tax
In the United States, individuals and corporations pay income tax on the net total of all their capital gains just as they do on other sorts of income, but the tax rate for individuals is lower on long-term capital gains, which are defined as gains on assets that had been held for over one year before being sold.
When a non-resident sells a property, the buyer retains 10% from the agreed sale price as a withholding tax which is paid over to the IRS to cover the sellers’ tax obligations. A tax return should be filed with the IRS to determine if an overpayment has been made and if a tax refund is subsequently due.
US Estate and Gift Taxation
US gift tax applies when property is transferred as a gift to a family member, friend or associate.
US estate tax may apply to somebody’s taxable estate at his death. The taxable estate is the gross estate less allowable deductions.
Worldwide Income
Depending on your local country laws, you may need to declare your US rental income to your home country tax authorities. If resident in the UK or Ireland you will have to declare any income received in the US in your annual resident tax return. There is a double taxation agreement between the US, Ireland and the UK so double taxation relief applies in some cases. Please contact us for further details regarding double taxation relief and / or filing your resident tax return.
Property Tax International can organise the completion and filing of all necessary US tax returns in addition to advising on your property tax obligations in your home country.
US Tax Services
Property Tax International provides a complete non-resident income tax return service specifically tailored to those with rental property in the US.
All our US tax filing services are carried out in-house by our team of US tax specialists. Your dedicated tax specialist will be your one point of contact throughout the return process and will communicate directly with the IRS when required.
Non-resident taxation in the US is a subject can be confusing which is why PTI’s US tax service has been specifically created to guide you through the service from beginning to finish. We offer the following services:
- U.S. Filing of Personal Tax Returns
- U.S. Individual Taxpayer Identification Number (ITIN) Applications
- U.S. Withholding Tax Amendment Returns (Tax Rebate Returns)
- U.S. Capital Gains Tax Returns
- Coordinating with your tax resident accountant
FAQs
- Are there any restrictions on non-residents when purchasing property in US?
- In general, there are no restrictions placed on people from outside the US buying property.
- Which are the additional purchase costs in the US?
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- Title insurance – this is a contractual obligation that protects against losses that occur when 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 born by the seller.
- Shall I be treated as non-resident alien or resident alien?
- Non-citizens in the US are classified as non-resident aliens and resident aliens. If someone is an alien (not a US citizen), he is considered a non-resident alien unless he/she meets one of the two tests:
- Green card test – A person is a resident for tax purposes if he is 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, he 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.
- As a non-resident individual who owns a property in the US, do I need to file a US tax return?
- Generally as an owner of a US real estate property you do not need to file a tax return. A tax return is required only for the year when you sell or otherwise dispose of your US property. The tax implications of receiving rental income are explained next.
- How are resident aliens and non-resident aliens taxed on income derived from US situated property?
- 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.
Non-residents receiving 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 non-resident landlord. A non-resident alien receiving rental income is not required to file an annual income tax return to report the rental income as the 30% tax withheld satisfies the US tax liability. However, the US tax law permits a non-resident alien to make a special election as explained in the following section.
- Special election under IRC Section 871(d) to file an annual return:
- In order to mitigate the 30% gross income withholding tax, the non-resident 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 non-resident 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.
- What are the US income tax rates?
- 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 from 10% to 39.5%. State tax may be required in addition to the federal rate depending of the rules imposed by the state where the property is located.
- What can I deduct as expenses against my US rental income?
- 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 which can be offset against your rental income.
- 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
- When do I need to file my US tax return?
- The deadline for filing a US income tax return is April 15th. There is an automatic extension given to residents aliens and US citizens living abroad who have until the 15th of June to file their US income tax return.
- Am I obliged to apply for US tax number if I am treated as non-resident alien?
- Non-resident aliens shall 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 non-resident alien may obtain an ITIN only if they receive or expect to receive taxable income from US sources.
- What else do I need to consider if I expect to receive rental income and I want to elect to tax this income net of expenses?
- 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 in order to relieve your tenant or property manager from the obligation to withhold 30% of the gross rental income remitted to you.
Tax Rates and Deadlines
USA Fees
Filing services are offered to non-US residents.
Rental Income Tax Return – €350.00.
This is a complete service covering the necessary federal tax return and annexes (single owner – 1 property), and includes a detailed review of all supporting documents.
State application – 45 euro (where needed, single owner – 1 property).
Tax number service fees or Tax registration – €110.00 per person.
Additional property – €85.00.
This fee is due for 2nd and each subsequent property.
Additional owner – €150.00.
This fee is due where there are multiple owners of a property and applies regardless of whether or not the owners are a married couple. This charge covers the preparation of the additional personal return due.
Capital Gains tax returns
The price will be based upon complexity of case and starts from €500.00
Administrative fee – €20.00.
This fee is obligatory and due for each year of submission. It covers postage, phone calls, photocopying etc.).
Multiple years discount – 10%.
This is available where returns for 2 or more tax years are required. This discount is applicable to the annual fees excluding any once off fees and administrative fee and does not apply where other discounts/reductions have been granted.
Notes:
1. All fees are inclusive of VAT.
2. Prices are based on provision of information in pre agreed format – a surcharge of 20% may be applied for disorganised files.
3. Prices are based on provision of necessary backup documentation only – the inclusion of unnecessary documentation may result in the application of an additional charge.