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. Email 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. The county property appraiser's office 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. This office also administers 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. These tax invoices 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 but 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 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 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. In summary:
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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. If more than one individual owns the property then every 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 you are a UK citizen, you are required to report your 'world-wide income' to HMRC in the UK. However, there is a US/UK tax treaty, 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 10% 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 15%. 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 are the tax implications of a Short Sale/Foreclosure?

These are general comments only – each situation will be different and will need to be reviewed on the basis of your particular circumstances and any agreements reached with your Bank or Mortgage Company (B/M). It is perhaps not the news you would like to receive but it needs to be considered.

The general advice is to talk to your Bank or Mortgage Company (B/M) - they don't want to foreclose and will try to work with you to resolve the issue if possible. However, they are looking out for their best interests; professional advice should be taken before making any commitments.

In the eyes of the IRS you are benefiting by a debt being cancelled. For example if your mortgage is $100k and is written off by the (B/M) then the IRS will consider the $100k as if you have an income benefit of $100k. In the absence of further information or a final tax return filing to claim costs, expenses and depreciation against the notional benefit the IRS will assess you on the full $100k.

A situation occurred in 2004 with a non-resident. The IRS traced the (then) owner and issued a significant tax assessment considerably larger than the original through penalties and interest to date.

The first constructive step should be to establish a good rapport with the Bank/Mortgage Company (B/M). They don’t want your property but perhaps can work with you to restructure your loan. The B/M might take the property at a Fair Market Value (FMV) if there is a reasonable chance of satisfying the mortgage within the FMV. However, you will lose the balance of any potential equity above the (FMV). Care and advice should be taken in discussion, the B/M understandably want the best deal for them.

The consequences of simply ‘walking’ away from the difficulty are not immediately apparent. Ignoring the situation and ‘walking’ will ultimately result in foreclosure – ‘no problem, they can’t chase me outside the US’ you might say. However, when the B/M has completed formal proceedings against you (or you agree a settlement with them) and the property has been sold for the best price achievable in a short time period and the statutory period of limitations has expired, the B/M will then claim the loss to them as a tax deduction. In slow time the IRS will look to match this claim with your US tax return showing the (B/M) loss as a benefit to you, on which they will be looking to tax you. If you have not filed a final US return and/or ignore any correspondence (or have moved from your last contact address on file with the IRS) the statutory response period will pass and the IRS will apply tax to the full amount at the highest rate together with penalties and interest which will continue to accrue.

It is important to obtain formal US taxation advice during the discussion process with the Bank/Mortgage Company and to file your US tax returns to avoid unforeseen consequences.

The problem can extend to HMRC in the UK because you need to declare any income or benefit in the US to HMRC, even if you might not consider the loss claimed by the B/M as a benefit to you until the IRS raise the issue.

The benefit and tax assessment can be mitigated or even eliminated by filing a final US tax return claiming appropriate costs, expenses and depreciation which the IRS will be able to match with the B/M tax credit claim. Not filing or ignoring correspondence can cause the US tax liability to grow rapidly into a significant tax assessment in the US. Retrospective filing may be disallowed by the IRS.

Advice from qualified and experienced accountants should be taken before making a decision in these matters.