Non Resident Rental Income Reporting Requirement

Your booking agent or management company is required to withhold and remit 30% withholding tax on rental income UNLESS they hold a current Form W-8 on file.  To avoid withholding, simply complete and return the appropriate Form W-8 to the withholding agent.  If withholding has already been remitted to IRS then the withholding agent is required to provide Form 1042-S (non resident aliens) or Form W-9 (U.S, citizens and resident aliens).  Any overpaid withholding is refunded once IRS has processed the taxpayer’s income tax return.

In brief, a nonresident alien’s US taxable income is divided into the following two categories:

(i) Income that is effectively connected to a trade or business in the United States

(ii) Income that is not effectively connected to a trade or business in the United States (“FDAP income”)

Income that is effectively connected to a U.S. trade or business, after allowable deductions, is taxed at the graduated rates applicable to U.S. citizens and resident aliens, while income that is not effectively connected to a U.S. trade or business is subject to tax at a flat rate of 30% that is withheld at the source.

Nonresident aliens who own U.S. property that generates rental payments are subject to the flat 30 % withholding tax on the gross rent unless the nonresident alien makes an election to treat the rental income as effectively connected to a U.S. trade or business.  Nonresident aliens who make this election can reduce their rental income by offsetting rental income with expenses pertaining to the rental activity.

For those that make the election they must report  on Schedule E of Form 1040NR. For those that do not make the election, the withholding agent is responsible to remit the 30 % withholding tax.

A withholding agent is a U.S. or foreign person that has control, receipt, custody, disposal, or payment of any item of income of a foreign person that is subject to withholding.[iv]  A withholding agent may be an individual, corporation, partnership, trust, association, or any other entity, including any foreign intermediary, foreign partnership, or U.S. branch of certain foreign banks and insurance companies.[v]  Thus, in the real estate context, a withholding agent would be either the tenant or the property manager since they have control and custody over the property owned by the NRA.