Frequently Asked Questions
Presented below are questions frequently asked by foreign (Non-resident Alien) owners of rental homes in the US. Though we try to answer the most common tax questions here, there are always more questions when it comes to your personal finances. Business, Trusts, Partnerships for example, are more complex and we would recommend a phone call to Jan to discuss your specific needs.
Review our list of FAQ’s below to answer many of the common questions. When you are ready to talk more, contact us for a full business consultation, or give us a call so that we can answer all your questions based on your own financial situation.
What do I need to do to ensure compliance with the US tax and reporting requirements?
The US taxation system is a tiered system requiring filings in the county where your property is located along with state and federal filings. In Florida the county property appraiser office’s levy a Tangible Personal Property Tax (‘business rates’) based on the value of the personal property (furnishings/appliances) used in your rental, the Return is filed by 1st April. The County appraiser office’s also administer the annual assessment of Real Estate Taxes (‘rates’ paid for schools, police, fire etc) based on the value of your house and land on the 1st of January. The property tax bills are issued in November. Most property owners with US mortgages will have an escrow account used by the mortgage company to pay your Real Estate taxes direct however, the Tangible Tax will need to be paid by you.
The Sales & Tourist Development taxes are paid by your clients (i.e. you collect sales & tourist development taxes on top of the rental rates and then pay these funds over to the appropriate authorities). If you rent your property for periods of less than six months you will be required to collect and pay sales tax to the State of Florida, Department of Revenue, on transient rentals (currently 6 percent). Your management company will usually collect and report all sales tax for you on the rentals they handle. Owners who rent their own properties should collect sales tax and communicate these actions to their management companies for reporting purposes, or pay the sales tax direct to the State of Florida. In addition to sales tax, a tourist development tax (TDT) must also be collected and paid monthly to the county in which your property is located (up to seven percent in some counties). Sales tax and tourist development tax must be collected on all rental income from properties located in Florida regardless of where the rent is collected. Rental periods longer than six months are not subject to these taxes.
Federal income tax returns can be completed on your behalf upon receipt of your information and need to be filed by 15th June for the previous calendar year. Form 1040NR, US Non-resident Alien Income Tax Return, is the form on which all income and deductions related to your rental property will be reported. By filing Form 1040NR, you are electing to have income from your rental property deemed to be connected with US trade or business. This in turn allows you to deduct ordinary and necessary expenses and claim depreciation on the business assets.
What Is FIRPTA?
The Foreign Investment in Real Property Tax Act (FIRPTA), is complex to navigate on your own. Let us guide you and work with you through the steps. We will review your options and keep your interests top of mind to walk you through the steps, and help you understand the process.
Learn more about FIRPTA here.
What is an ITIN (Individual Taxpayer’s Identification Number and do I need one?
Yes. The US Internal Revenue Service (IRS) requires ‘Non-resident Alien’ property owners to have an Individual Taxpayer Identification Number (ITIN). A separate ITIN is required for each part owner. If you do not already have an ITIN you can apply with your US 1040NR tax return. Forms and instructions are provided with our services.
In addition, a Form W-8ECI, Certificate of Foreign Person’s Claim for Exemption from Withholding on Income Effectively Connected with the Conduct of a Trade or Business in the United States, should be filed with your management company for each owner, and if requested, a W-8BEN filed with your US Bank/Mortgage provider.
My management company says they are paying my taxes from the rental income?
Property management companies usually pay the state sales and tourist development tax they collect as this relates directly to a tax on rental income. They would not normally be involved in Federal or property taxes and would not normally be qualified to undertake income tax advice.
What expenses can I offset against the rental income from my property?
Deductions include, but are not limited to: advertising, cleaning, maintenance, commissions, insurance, tax return preparation fees, management fees, mortgage interest, repairs, supplies, property taxes, depreciation and utilities. Most expenses that are ordinary and necessary in the operation of a rental property are deductible. If larger expenditures are required (i.e. new air conditioner), these items are capitalized and depreciated over future years.
In addition, if your (owners only) trip is primarily for business purposes, the airfare and certain related travel expenses are deductible. These expenses might include car rental, local transportation to and from a meeting with your property manager and a meal over which a business discussion took place. The expenses must be allocated between business and time spent for pleasure.
I have heard that we can depreciate the cost of the house, furniture and large repairs. Is this true?
Yes, since the house (not including the land), furniture and some large repairs have a useful life greater than one year, they must be depreciated. Under the current laws, the cost of the house is ‘capitalized’ and deducted over a period of 27.5 years. Furniture, equipment and land improvements usually have a useful life of 5 to 15 years, depending on the specific item.
I did not make any profit, why do I need to file a tax return?
US law requires you to file a return to report your income and expenditure, even if you have no tax liability. In addition, for most non-resident taxpayers, annual losses roll over to future years. When you eventually sell your property these accumulated losses may be used to offset capital gains tax. If you do not have a tax liability, you might be wondering what will happen if you do not file a return. Well, the IRS will not impose penalties if no tax is due. However, the terms of your visa require you to comply with all laws of the United States, including the requirement to file an income tax return. You might be required to show proof that you filed if you wish to change your visa status, or obtain permanent residency, or regain entry into the United States once you have left. Don’t risk your visa status by failing to comply with this requirement.
If my spouse and I jointly own the property, will we have to file two returns?
Yes, because US Non-resident Aliens are not allowed to file a joint US tax return even if married. If more than one individual owns the property then each owner must file a tax return, have an ITIN number and have a Form W-8ECI on file with their management company.
If I own more than one rental home in Florida, will I be required to file more than one tax return?
No. An unlimited number of rental homes can be reported on one Form 1040NR. Each rental property’s revenue and deductions are reported separately on the Schedule E, Supplemental Income Schedule.
If I file a US Form 1040NR, do I need to report my holiday home rental income and deductions to my home country?
Yes, if for example you are a UK citizen, you are required to report your ‘world-wide income’ to the UK tax authortity (HMRC). Many other Counties have similar requirements. However, there is a US/UK tax treaty (many countires have a tax treaty with the US), which eliminates any ‘double taxation’ between the two countries. You are eligible to receive a credit for taxes paid to the United States. Most 1040NR non-resident returns for rental property show a loss after depreciation and operating expenses are taken into account, therefore US income tax is seldom owed.
What happens when I sell my property?
As a non-resident alien, the IRS has no authority to collect US tax once you have left the US (i.e. sold your holiday home). To ensure collection of any tax that may be due, the IRS requires the withholding agent (i.e. usually a title company) to withhold 15% of the gross sale price from the seller’s proceeds. However, due to depreciation, mortgage interest and other operating deductions, your rental property will probably have generated a tax loss when being rented. These losses are accumulated on Form 1040NR and carried forward to reduce future income or gain from the sale of the property. Professional advise should be sought prior to closing to file a Form 8288-B, Application for Withholding Certificate of Dispositions by Foreign Person’s of U.S. Real Property Interest which will reduce or eliminate withholding under section 1445 or to file your subsequent calendar year Form 1040NR and report the sale of your property, the withholding tax is reported as a credit. This credit is applied to any tax due from gain on the sale of your property and any excess will be refunded to you. If you have no gain, all of your withheld tax will be refunded to you. Form 8288-B MUST be filed before closing to allow the Title Company to hold the funds. It can be filed prior to closing to initiate IRS processing and expedite the refund.
Generally, gain from the sale of long-term capital assets held for more than one year is subject to a maximum capital gains tax rate of 20%. However, a maximum 25% rate is imposed on long-term capital gain attributable to certain prior depreciation claimed on real property. This depreciation is referred to as ‘unrecaptured Section 1250 gain’.
What Is the Foreign Tax Deduction?
The foreign tax deduction is one of the itemized deductions that may be taken by American taxpayers to account for taxes already paid to a foreign government, and are typically classified as withholding tax.