All foreign investors owning U.S. rental property are responsible for paying taxes on any and all rental income they earn in the U.S. regardless of any tax treaties that may exist.
Since some of the regulations and requirements can be confusing, WILMOTH Group has created this document to summarize the options for a foreign investor.
Foreigner investors can either pay a flat tax of 30% of their gross rental income or elect to file an annual US tax return and reduce their taxes by claiming deductions relating to ownership and managing the property. (i.e. Property Taxes, Insurance, Management Costs, etc.)
With either method of taxation, foreigner investors must have an Individual Taxpayer Identification Number (ITIN).
Obtaining A Taxpayer ID
As soon as possible, foreigner investors need to obtain a U.S. ‘Individual Taxpayer Identification Number’ (ITIN) for each owner of the property (Each person listed on the property deed). The application is done with IRS Form W-7, and foreigners must provide original certified identification documents.
The IRS has ‘Certified Acceptance Agents’ who are authorized to certify foreigner investors’ original documents and process the application. The W-7 form may look easy to complete, but we highly recommend finding a certified agent to handle it. Certified Acceptance Agents are located worldwide. It normally takes 4-6 weeks for a W-7 to be processed by the IRS.
Here is a link to the IRS website, listing Certified Acceptance Agents by Country: IRS Certified Acceptance Agents
Upon receiving an ITIN number from the IRS, a copy of the IRS letter showing the new Individual Taxpayer Identification Number (ITIN) must be sent to LPM.
Note: WILMOTH Group will not manage rental property for foreign owners who do not acquire an ITIN number.
The Internal Revenue Service (IRS) requires property managers to withhold 30% of gross rents to ensure foreigner investors will file a tax return at year end. This is obviously very costly and cumbersome for a property manager and Logical Property Management will not do it.
However, there is an alternative that will exempt a foreign investor from the mandatory 30% withholding.
After obtaining an Individual Taxpayer Identification Number (ITIN), submit a completed IRS Form W-8ECI to WILMOTH Group.
Note: Do not send the Form W-8ECI to the IRS. You send it to your property manager.
By filing Form W-8ECI foreign investors eliminate the mandatory 30% tax withholding as it notifies the property manager (and the IRS) the foreign investor will be filing annual tax returns to report their income and expenses related to the rental property. Most generally, Form 1040NR (Non-Resident Tax Return) is filed with the IRS. Those tax returns are due by June 15th of each year and you should consult with your tax professional.
W-8ECI Form remains in effect for a period starting on the date the form is signed and ending on the last day of the third succeeding calendar year, unless a change in circumstances makes any of the information on the form incorrect. For example, a Form W-8ECI signed on September 30, 2020, remains valid through December 31, 2023. Upon expiration of the 3-year period, you must provide a new Form W-8ECI.
If you do not file a form W-8ECI with your property manager, your property manager is REQUIRED by law to withhold 30% of your income from the rental and forward the funds to the IRS.
Note: WILMOTH Group will not manage properties for owners who do not file the W-8ECI form with us. Our business is property management and we do not choose to become tax collectors and have to administer sending 30% of your funds to the IRS.
At the end of each year your property manager should provide you with a year-end statement of your income and your expenses related to the management of your property. After obtaining your U.S. Taxpayer Identification Number, along with the year-end statement, you will receive a copy of IRS Form 1099 that reports your income to the IRS. You will then use your copy of Form 1099 to file taxes through your tax professional.