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is subject to a flat 30 percent with - holding tax on the gross proceeds. All foreign investors owning U.S. property are responsible for paying taxes on any 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 PERSONS WITH THE FORM 1042-S This collection responsibility of the 30 percent flat tax falls on the payor (property management company), and if you fail to withhold, the IRS can hold the company personally lia- ble 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, Foreign Per- sons U.S. Source Income Subject to Withholding to the IRS and the payee by March 15 of the following calen- dar year. This form must be filed to report gross rental income even if the owner was not subject to the tax withholding. ELECTION TO TREAT RENTAL INCOME AS EFFECTIVELY CONNECTED WITH U.S. TRADE OR BUSINESS Unless the foreign investor has properly informed the property manager that the rental income is to 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

It is easy to manage rental properties of foreign owners once you have a good system in place. ” —Richard Hart

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. WITHHOLDING AGENT ISSUES A FORM 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 con- trol, 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 personally and primarily liable for any tax that must be withheld. The liability of the withholding agent includes amounts that should have been paid plus inter- est, penalties and, where applicable, criminal sanctions. The statute of limitations does not start until a with- holding return is filed by the with - holding agent.

ITIN NEED 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 Unit- ed 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 owners once you have a good system in place to ensure compliance with the IRS. •

Richard Hart, EA, CAA is an attorney with Hart & Associates, and has written many articles for the National Association of Residential Property Managers®

(NARPM) publication, Residential Resource. He can be reached at 702-589-4687. Members of NARPM® receive information like this article every month through its news magazine, Residential Resource. Reprinted with permission. To join NARPM or to learn more, visit NARPM.org/join.

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