The U.S. tax code states that such an activity by a foreign person is subject to a flat 30 percent withholding tax on the gross proceeds. All foreign investors owning U.S. property are responsible for paying taxes on any and all rental income they earn in the United States. Rental income from real proper- ty located in the United States and the gain from its sale will always be U.S. source income subject to tax in the United States regardless of the foreign investor’s personal tax status and regardless of whether the United States has an income treaty with the foreign investor’s home country. RENTAL INCOME WITHHOLDING/REPORTING OF FOREIGN PERSONSWITH THE FORM 1042-S This collection responsibility of the 30 percent flat tax falls on the payor (property management com - pany), and if you fail to withhold, the IRS can hold the company person- ally liable for failing to withhold 30 percent of the gross rents. Thus, all property managers should start withholding immediately. The gross income and withheld taxes must be reported on the Form 1042-S, For- eign Persons U.S. Source Income Subject to Withholding to the IRS and the payee by March 15 of the following calendar year. This form must be filed to report gross rental income even if the owner was not subject to the tax withholding. ELECTIONTO TREAT RENTAL INCOMEAS EFFECTIVELY CONNECTEDWITHU.S. TRADE OR BUSINESS Unless the foreign investor has properly informed the property manager that the rental income is to
It is easy to manage rental properties of foreign owners once you have a good system in place to ensure compliance with the IRS.”
be treated as “effectively connected income” by submitting to the proper- ty manager a fully completed Inter- nal Revenue Service Form W-8ECI, Certificate of Foreign Person’s Claim for Exemption from Withholding on Income Effectively Connected With the Conduct of a Trade or Business in the United States , the property manager will withhold 30 percent of the gross rental receipts so as to avoid personal liability. A fully com- pleted Form W-8ECI must include a valid U.S. tax identification number. WITHHOLDINGAGENT ISSUES AFORM 1042-S To enforce the system of with- holding, the Internal Revenue Code defines a “withholding agent” to be any person in whatever capacity (including lessees and managers of U.S. real property) having the control, receipt, custody, disposal, or payment of income that is subject to withholding. Thus, a real property manager who collects rent on behalf of a foreign owner of real property is clearly considered a withholding agent . A withholding agent is person- ally and primarily liable for any tax that must be withheld. The liability of the withholding agent includes amounts that should have been paid plus interest, penalties and, where applicable, criminal sanctions. The statute of limitations does not start until a withholding return is filed by the withholding agent.
ITINNEED A foreign owner will need an
Individual Taxpayer Identification Number or ITIN. However, there are certain cases where a foreign person has a U.S. Social Security number, perhaps because they attended Uni- versity in the States. If the foreign person is not a citizen of the United States, and has a Social Security number, they do not need an ITIN. They can use the Social Security number to file a form W-8ECI. Once an ITIN or SSN has been received, form W-8ECI can be prepared and submitted to the property manager for their records and the 30 percent withholding can cease. Although the above information seems daunting, it is easy to manage rental properties of foreign own- ers once you have a good system in place to ensure compliance with the IRS. If you need assistance on how to apply any of this information, feel free to reach out to me and I would be happy to help. •
Richard Hart, EA, CAA, is the owner of Hart & Associates Tax Consulting and Preparation Services and a NARPM® Affiliate Member. He specializes in tax
accounting and has earned the credentials of Enrolled Agent and Certified Acceptance Agent with the Internal Revenue Service. NARPM® receive information like this article every month through its news magazine, Residential Resource. To join or learn more, visit NARPM.org/join.
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