Nonresident Aliens and U.S. Rental Income
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Nonresident Aliens & U.S. Rental Income
Nonresident Aliens and U.S. Rental Income: With the IRS continuing to prioritize international tax as part of its key compliance efforts, it was only a matter of time before they got wind of the rampant non-reporting of income generated from U.S. properties owned by nonresident aliens. It is common (especially for very wealthy nonresident aliens) to purchase numerous properties in the U.S. — all cash — and begin generating immediate income. And, because there is no mortgage, there are not many deductions or expenses to offset the income — and the properties immediately generate a net profit.
Since many nonresident aliens do not have any other income in the U.S., they oftentimes do not file tax returns with the IRS — if only because they were unaware they were required to do so. Likewise, the renter is unaware that the owner is a nonresident and therefore the renter is not withholding any rent money — and the NRA has not properly made the election to treat the otherwise rental income FDAP as ECI.
Nonresident Alien Rental Income Compliance Group
In October, the IRS announced a new international tax compliance enforcement campaign for rental property:
“Practice Area: Withholding and International Individual Compliance
Lead Executive: Deborah Palacheck, Director of Withholding & International Individual Compliance
Campaign Point of Contact: Ursula Gee
Nonresident aliens who receive rental income from U.S. real property must comply with all tax reporting and filing requirements. This campaign will address noncompliance through examinations, education, and outreach.”
Here are four (4) reasons why the IRS launched the nonresident alien with rental income from US property enforcement compliance group.
Unreported Income
Even though nonresident aliens reside outside of the United States, the U.S. rental income they earn from rental property located within the U.S. is still taxable by the U.S. government.
In other words, rental income in the U.S. is not tax exempt, even when the owner resides outside of the U.S. is not otherwise subject to U.S. tax laws.
30% Withholding
Most renters would have no idea that they are required to withhold 30% of the rent paid to a foreign seller and direct that money to the IRS.
Why would they, right?
They tenant is literally just renting someone’s home or other property, and what do they care if the owner is a nonresident alien —
Since most renters do not withhold the money, and most NRAs do not properly file U.S. tax returns and make the necessary election to treat the otherwise rental income FDAP as ECI — the IRS rarely receives adequate tax payments on the income generated from nonresident owned U.S. property.
Lots of Undisclosed Income
Many nonresident aliens who purchase rental property in the United States, purchase it for cash.
As a result, even if there are some expenses to deduct from income, oftentimes it will net a profit – especially if there are multiple properties.
Therefore, the Internal Revenue Service is missing out on a significant amount of income.
FIRPTA Concerns
At some point in the future, when the foreign owner sells the property, they will be subject to FIRPTA.
With FIRPTA, the withholding agent must retain 15% of the sale price (not profit), which is then diverted to the IRS pending the filing of a tax return — or unless a withholding certificate was obtained.
By having the renter properly withhold the rent and submitting it to the IRS, the IRS is on notice of the properties owned by foreign nonresident aliens, and can take action accordingly.
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