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.
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.