Foreigners investing in Rental Property in the U.S.
U.S. real estate professionals, rental agents, and property managers are encountering an increasing number of instances that involve foreign persons’ acquiring U.S. real estate as an investment, as a part-time residence or in conducting a business. The U.S. tax rules that apply to ownership and dispositions of U.S. real estate by foreign persons are not always the same as those that apply to U.S. persons.
U.S. real estate professionals must know how to properly deal with foreign investors in U.S. real estate in order to be in compliance with the federal tax laws affecting real estate transactions. They must be familiar with the rules that determine whether an individual or entity is to be treated as a U.S. person or a foreign person. In addition, they must also be familiar with the fundamentals of U.S. federal income taxation of foreign investors with U.S. rental income.
What are your responsibilities when you are a Foreign Property Owner and you are renting your property?
Annual tax returns will need to be filed by a foreigner holding U.S. property for rent or held as investment. Form 1040NR is required for nonresident alien individuals and Form 1120-F for foreign corporations. A single member LLC would require a 1040NR in some instances, however it ultimately depends on the foreign country you are a resident of. For example, Canadians even holding a single member LLC would need to file an 1120-F (as the Canadian Government doesn’t recognize the LLC as a ‘flow thru’ entity). In these instances, engaging a professional firm is absolutely critical.
Who is considered a foreign person?
You are considered a foreign person if you, the “Seller” of US real estate, are a:
- Non-resident alien individual
- Foreign corporation that has not made an election to be treated as a domestic corporation
- Foreign partnership
- Foreign trust, or foreign estate
*A resident alien, electing to be treated as a US resident, is NOT considered a foreign person according to FIRPTA