I represent foreign nationals and non-resident aliens in Washington DC, and the greater DMV area who have IRS or State tax issues. According to 2018 data from the National Association of Realtors, foreign and non-resident buyers accounted for 8% ($121 billion) of U.S. home sales. Given that most realtors and affiliated industry professionals spend their time and mental space serving the domestic 92%, finding tailored advice for foreign nationals and non-residents who want to buy (or convert existing property into) U.S. rental real property can be a challenge.
In this article I want to clarify some confusing aspects of U.S. rental real estate ownership that foreign-born buyers face. Specifically, those people include:
- Foreign nationals living overseas.
- Foreign nationals living in the U.S. on a visa.
- Foreign-born U.S. Green Card holders.
- People who have switched out of U.S. citizenship or Green Card status.
- People in any of the above categories who need help in resolving IRS or State tax rental income issues.
I will assume that you have already covered some vital basic ground before deciding to buy (or convert your home into) U.S. rental real property: location, location, location (of course), but also demographics, financing, insurance, emergency fund, your rental property management behavioral fitness, etc. Let’s then dive into the tax aspects of your investment, where many mistakes are made in the absence of good advice.
To purchase real estate property in the U.S., you do not need to be a U.S. citizen or Green Card holder. However, if your goal is to generate U.S. rental income or hold U.S. real estate as a long-term investment, you will need an Individual Taxpayer Identification Number (ITIN) if you cannot obtain a U.S. Social Security Number. To obtain an ITIN, you will need a valid passport. You may be able to buy the property without an ITIN, but you should get an ITIN as soon as possible.
While you pay no tax as you buy your real property, your closing agents (attorneys, title search companies, etc.) are generally required to file Form 1099-S with the Internal Revenue Service (IRS). Form 1099-S will reflect your status as a foreign investor or U.S.-based non-resident. It will also establish with the IRS some expected tax rates that will apply to your future rental income or capital gains upon selling your property. Even if you later acquire U.S. citizenship, a Green Card, or U.S. tax residency, keep in mind—as the IRS will be doing—what your tax status was at the time of purchase.
Once your real property is rented out, your gross rental income will be taxed at a flat rate of 30% and you cannot deduct any of your rental operating expenses, property taxes paid, or depreciation from your gross income. The payors of your rental income (your tenants, Airbnb, etc.) are supposed to withhold the 30% tax and forward it to the IRS. They will then issue you a Form 1042-S statement, showing your income and taxes paid. If you have no other U.S.-sourced income, you do not need to file a U.S. federal tax return for the year, although this may not mean that you have no State-level tax filing obligation.
A 30% tax rate without the ability to deduct allowable expenses would be a severe limitation to foreign or non-resident investment in U.S. real property. Luckily, this is not the end of the story. It is possible for foreign and non-resident real property investors to pay lower tax rates on Net Income rather than on Gross Income. I will discuss how to achieve this in Part 2 of this article.
Meanwhile, If you have (or someone you know has) questions on this subject or would like help resolving any rental income tax matters involving a foreign national or U.S. non-resident alien with the IRS or a State, please feel free to contact me by phone (1-877-632-6829) or email at akyele@archersolutions.biz.
Abraham Kyele King’oo, EA, MBA
6400 Georgia Avenue NW, Suite 11
Tel. 1-877-632-6829
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