A nonresident renting U.S. real estate has two options as to how this activity will be taxed at the federal level. Oftentimes, a nonresident does not become aware of these requirements until the year that the property is sold. At that point, there is no good solution to becoming compliant. While there are alternatives available, they each come with associated risks.
Nonresidents are required to pay a tax of 30% of the gross annual rental income to the Internal Revenue Service (IRS) each year. It is the obligation of the nonresident or property manager to ensure that this payment is made. No notification of tax due will be sent by the IRS. If this is payment is made, filing a U.S. federal income tax return is not required, but this also means that no tax benefit for deduction of expenses is allowed.
In order to avoid the mandatory 30% withholding, the nonresident may elect to treat the rental activity as effectively connected with a U.S. trade or business. By doing so, the nonresident agrees to file annual U.S. income tax returns in lieu of paying the 30% tax on the gross rent. Making this election is the most common choice. It allows the related business expenses to be deducted against the rental income, oftentimes reducing the tax liability to zero. If there is a property manager, the nonresident must provide him with a completed Form W-8ECI. The property manager must keep this form on file to support why he is not withholding and remitting the 30% tax to the IRS.
If the nonresident has neither remitted the 30% tax nor filed annual income tax returns for any of the years that the property has been rented, there is no good solution to this situation. There are four alternatives available, which are described below along with their associated risks:
It is up to the nonresident to take into account his particular circumstances and decide how to proceed.