International Landlords / U.S. Requirements
Foreign persons receiving rental income are subject to a 30% tax rate on income received from U.S. sources. Your property management company is required to withhold 30% of the rent collected which is paid directly to the IRS on a quarterly basis.
IRS Definition of A Withholding Agent
To enforce the system of withholding, the Internal Revenue Code defines a “withholding agent” to be any person in whatever capacity having the control, receipt, custody, disposal or payment of income that is subject to the withholding. Therefore, a property manager who collects rent on behalf of the international landlord of real property is considered a withholding agent.
Foreign Investors And Passive Rental Income
U.S. rental income realized by foreign persons is considered passive income and falls into the fixed, determinable, annual or periodic (FDAP) category. FDAP income is taxed at a 30% flat rate on gross receipts.
Withholding Exemption: Passive Rental Income vs. Effectively Connected Income
If the foreign person wants to avoid the 30% withholding on rental income, they need to shift from passive rental income to effectively connected income.
- First, foreign individuals and foreign corporations need to make an election to have their passive rental income taxed as if it were effectively connected. Such an election is made by attaching a declaration to a timely filed income tax return.
- Second, they have to notify the property manager by submitting Form W-8ECI with a valid U.S. tax identification number.
- Third, timely tax returns must be filed on Form 1040 NR every year the foreign person owns the property.
Clockwork Property Management is here to help
The required W-8ECI form will be included with our property management contract. This form will exempt foreign persons from the 30% withholding requirement. To fill out this form you will need a ITIN number, social security number or an EIN number. The ITIN number is by definition an Individual Taxpayer Identification Number issued by the IRS to ensure individuals pay taxes if they do not have a social security number or an EIN number.
If you do not have an SSN and are not eligible to get one, you must get an ITIN. To apply for an ITIN, file Form W-7 with the IRS. It usually takes 4-6 weeks to get an ITIN number.