SR Glossary: Foreign ownership of U.S. rental property

Historic_home_in_Poplar_Lawn_Historic_DistrictThe method by which rental income will be taxed depends on whether or not the foreign person who owns the property is considered “engaged in a U.S. trade or business.”  Ownership of real property is not considered a U.S. trade or business if it consists of merely passive activity such as a net lease in which the lessee pays rent, as well as all taxes, operating expenses, repairs, and interest in principal on existing mortgages and insurance in connection with the property. Such passive rental income is subject to a flat 30 percent withholding tax (unless reduced by an applicable income tax treaty) applied to the gross income rather than the “net rent” received.

If, on the other hand, the foreign investor is engaged in a U.S. trade or business such as the developing, managing and operating a major shopping center, the gross rent will not be subject to withholding and will be taxed at ordinary progressive rates.

If the foreign investor’s rental activities do not rise to the level of a U.S. trade or business, there is an election that may apply which allows for the activity to be treated as a U.S. trade or business, and then allows for the activity to be taxed on the net income rather than the gross rent.

If you are a foreign person who owns a U.S. rental property and would like guidance on how to minimize tax liability, contact a ShindelRock tax professional today.