New IRS Campaign Targets Nonresident Rental Income

“Practice Area: Withholding and International Individual Compliance

Lead Executive: Deborah Palacheck, Director of Withholding & International Individual Compliance

Campaign Point of Contact: Ursula Gee

Nonresident aliens who receive rental income from U.S. real property must comply with all tax reporting and filing requirements. This campaign will address noncompliance through examinations, education, and outreach.”

What is a non-resident?

For U.S. tax purposes, a non-resident is a person that is not a U.S. citizen, is not a lawful permanent resident, and does not meet the Substantial Presence Test.

Rental income — passive income

For non-resident aliens (NRAs) who own U.S. real property directly, and not through a business entity, U.S. rental income is generally taxed on a 30 percent gross basis. Usually this tax is withheld at source.

Rental income — U.S. trade or business

If a U.S. real property is operated through a U.S. trade or business and the income is “effectively connected with a U.S. trade or business”, it is subject to tax at graduated rates. Although this requires the filing of a U.S. non-resident tax return, the benefit is that the NRA is taxed on net rental income rather than gross, and at graduated rates rather than a flat 30%.

Special election

NRAs can elect to treat income from U.S. real property as trade or business income, regardless of whether or not the NRA is actually engaged in a trade or business. The purpose of this election is to allow real property income to be taxed on a net basis and allow related deductions to be taken into account. After making the election for any taxable year, the election remains in force for subsequent years unless the IRS consents to its revocation.

What to do if you are non-compliant?

Seek counsel and file or amend your U.S. tax returns as soon as possible.