Applies to: Non-resident aliens (form 1040NR)

If you own US real property, and you rent it to anyone, then you have two issues to think about: Withholding tax and a tax return.

Withholding tax

The tenant must remit 30 percent of the gross revenue to the IRS. This applies whether or not the tenant is a US person.

Instead, if you wish, you can provide form W-8ECI to the tenant. This form tells the tenant that you will be filing a US tax return. Once you have provided this form, no withholding is required.

Often, landlords will have agents collect the rent for them. If you have an agent, then you need only provide the agent with form W-8ECI.

Filing a return

You can elect to file a return to report the net rental income, whether or not you had tax withheld. Of course, if you gave any tenant form W-8ECI, then you must file a return.

When you file a return, you pay tax:

• On your net income, instead of gross rent. Net income means after deductions, including depreciation.
• At graduated rates instead of the flat 30% rate. Graduated rates start at 0%, and go as high as 35%. But the highest rate only applies to income over US$326,450 (for a single person in 2005), so the effective rate is almost always lower than 30%.

We find that for the vast majority of our clients, filing a return is advantageous.

This communication is designed for the information only.  Readers should not act on any of the information without seeking professional advice.  This communication does not constitute professional advice.  SF Partnership accepts no liability or responsibility whatsoever for any loss or damage suffered by any user of this information.

This written advice was not intended or written to be used, and it cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer.  The foregoing legend has been affixed pursuant to US Treasury Regulations governing tax practice [Circular 230 §10.35]