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US Income Tax Compliance for Nonresident Owners of US Rental Property

US Income Tax Compliance for Nonresident Owners of US Rental Property

Income Tax is filed annually to the Internal Revenue Service (IRS) due by June 15th (for most non-resident homeowners) using Form 1040NR

All property owners residing offshore who receive income from their investment and rental properties, where IRS withholding has not been applied, must file a U.S. income tax return. The U.S. tax year runs January to December and returns are due, for most non-residents, by June 15th annually. If, however, you have worked in the U.S. during the tax year your deadline may be April 15th. Extensions are available until August 15th or October 15th.

Expenses are offset against rental income and any losses carried forward year on year until the eventual sale of the property when certain allowable losses may be used to minimize any capital gain on the property. Allowable expenses include; advertising, cleaning & maintenance, commissions, insurance, accounting & legal fees, management fees, mortgage interest, repairs & supplies, property and tangible personal property taxes and utilities. Flights and car hire are also deductible for owners visiting to purchase, sell or maintain their rental property.

The rental property is depreciated over 27.5 years and furniture & equipment between 5 and 15 years. By taking advantage of these deductions the result, for the majority of homeowners, is no taxable income.

Understanding Vacation Home Loss versus Passive Activity Loss

There are two methods of calculating any losses incurred in running your rental property:-

Vacation Home Loss

Where your personal use days are more than the greater of 14 days or 10% of your rented days, any losses are considered “vacation home loss“. Expenses incurred during the year are pro-rated between the total number of personal use days divided by the total number of rented days plus the total number of personal use days. The expenses are then used up to the amount of rental income received and the balance of any unused expenses are then carried forward to the following tax year as “vacation home loss”.

Personal Use Days are any days that you or your friends and family use the property for no charge or less than “fair rental” charge. Days that you are in your property carrying out maintenance or repairs etc. are NOT personal use days.

Example – Rental income = $15,000. Expenses = $20,000. Total of rented days is 200 and total of personal days is 25. The expenses of $20,000 are pro-rated by 25/225 = 88.89% business use. $20,000 x 88.89% = $17,778 of allowable expenses. The expenses are used up to the amount of the rental income of $15,000 giving a Carry Forward Vacation Home Loss of $2,778.

Please note that Vacation Home Loss can only be used to minimize your annual income tax payment to the IRS; it CANNOT be used to minimize Capital Gains Tax at the time of sale.

Passive Activity Loss

Where your personal use days are less than the greater of 14 days or 10% of your rented days; any losses are considered “passive activity loss”.

Example – Rental income = $15,000. Expenses = $20,000. Total of rented days is 200 and total of personal days is 10. The expenses of $20,000 are pro-rated by 10/210 = 95.24% business use. $20,000 x 95.24% = $19048 of allowable expenses. Rented income of $15,000 – Expenses of $19048 = $4048 Passive Activity Loss.

Unlike “vacation home loss”, “passive activity loss” can be used to minimize Capital Gains Tax.

Individual Income Tax Rates

The below Tax Rate Schedules are shown so that you can see the tax rate that applies to all levels of taxable income. Do not use them to calculate your tax.

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