Non-Resident Landlord Tax Rates in the U.S.

For individuals who are not U.S. citizens or residents, owning rental property in the United States introduces specific tax obligations. For U.S. tax purposes, a “non-resident alien” is an individual who is not a U.S. citizen and does not meet either the “green card test” or the “substantial presence test.” Income generated from real estate located in the U.S. is considered U.S. source income and is subject to taxation by the Internal Revenue Service (IRS), regardless of where the owner resides.

The Default Tax Withholding Rule

The standard method of taxation for a non-resident landlord is a flat 30% withholding tax applied to the gross rental income. This income includes all payments received from the tenant before any deductions for expenses are considered. The responsibility for collecting and remitting this tax falls to a “withholding agent,” which can be the tenant or a property management company.

This withholding is not an estimate; it is a final tax unless an alternative method is chosen. The withholding agent is required to report and pay the withheld amounts to the IRS. They use Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons, to reconcile and submit the total tax withheld during the year.

Electing to Be Taxed on Net Rental Income

A non-resident landlord can make a special election to treat the rental income as “Effectively Connected Income” (ECI) with a U.S. trade or business. This choice fundamentally changes how the income is taxed. Instead of a flat 30% tax on gross revenue, the landlord is taxed on their net rental income at the same graduated tax rates that apply to U.S. citizens and residents.

Making this election allows the property owner to subtract numerous costs from the gross rent before calculating the taxable income. Allowable deductions include:

• Mortgage interest paid on the property’s loan
• Local and state property taxes
• Insurance premiums
• Costs for repairs and ongoing maintenance
• Fees paid to a property management company
• Other operational expenses

A significant deduction available under the ECI election is depreciation. This allows the owner to recover the cost of the residential rental building over a period of 27.5 years, creating a non-cash expense that can substantially reduce taxable income.

Required Filings and Forms

To utilize the net income taxation method, a non-resident landlord must proactively file specific forms. The first step is to complete and provide Form W-8ECI, Certificate of Foreign Person’s Claim That Income Is Effectively Connected With the Conduct of a Trade or Business in the United States. This form is given to the withholding agent, such as the property manager, to certify that the income is effectively connected and to stop the 30% gross withholding.

Filing an annual U.S. tax return is the next requirement. Non-resident landlords must use Form 1040-NR, U.S. Nonresident Alien Income Tax Return, to report their rental income and expenses. To file this return, the owner must have a U.S. taxpayer identification number. If the landlord is not eligible for a Social Security Number, they must apply for an Individual Taxpayer Identification Number (ITIN) from the IRS using Form W-7.

The initial election to treat rental income as ECI is made by attaching a statement to the first Form 1040-NR filed. This statement must clearly declare the choice is being made. Along with the 1040-NR, the landlord must also file Schedule E (Supplemental Income and Loss) to provide a detailed breakdown of the total rental income received and list all deductible expenses for the year.

State and Local Tax Considerations

Beyond federal tax obligations, non-resident landlords must also consider state and local taxes. Most states that impose a personal income tax require non-residents to pay tax on income generated from property located within their borders. This means that in addition to filing a federal Form 1040-NR, a separate non-resident state income tax return is typically required.

The rules and tax rates vary significantly from one state to another. Generally, states follow a system similar to the federal ECI election, allowing landlords to deduct expenses and pay tax on the net rental income. However, the specific deductions allowed and the tax rates applied are determined by state law.

Landlords must ensure they are registered with the state’s tax authority and file the appropriate state forms by their respective deadlines. Failure to do so can result in penalties and interest charges from the state, separate from any issues with the IRS.

Tax Implications of Selling the Property

When a non-resident alien sells U.S. real estate, the transaction is governed by the Foreign Investment in Real Property Tax Act (FIRPTA). Under FIRPTA, the buyer of the property is required to act as a withholding agent and remit 15% of the gross sales price to the IRS.

This 15% withholding is not the final tax owed but rather a prepayment to cover any potential capital gains tax liability. The actual tax is calculated on the profit from the sale, which is the sales price minus the seller’s adjusted basis in the property. The adjusted basis typically includes the original purchase price plus the cost of any capital improvements, less any depreciation taken during the ownership period.

To reconcile the amount withheld with the actual tax due, the non-resident seller must file a Form 1040-NR for the year of the sale. On this return, the seller reports the capital gain and calculates the tax using the applicable capital gains tax rates. If the 15% FIRPTA withholding exceeds the final tax liability, the seller can claim a refund for the overpayment from the IRS.