Foreign owners of U.S. rental property have unique withholding and filing rules
The question that starts this
“I live outside the U.S. and own a rental property there. What are my U.S. tax obligations on the rental income?”
What this scenario is about
Foreign owners of U.S. rental property face 30% gross withholding by default on rental income. However, making a net income election under IRC Section 871(d) allows you to be taxed on net rental income at graduated rates, which is almost always more favorable.
Why this matters
Without the net income election, 30% is withheld on gross rents with no deductions for expenses, mortgage interest, depreciation, or management fees. The election transforms the tax treatment dramatically.
Common mistake
Not making the net income election and accepting the 30% gross withholding, or failing to file the required Form 1040-NR to claim the election and deductions.
Checkpoints to work through
- 1
Default treatment is 30% withholding on gross rents
Without an election, FIRPTA and NRA withholding rules require the tenant or property manager to withhold 30% of gross rental payments and remit to the IRS.
- 2
The net income election changes everything
IRC Section 871(d) lets you elect to treat rental income as effectively connected income, allowing deductions for expenses, depreciation, and mortgage interest against rental revenue.
- 3
Form 1040-NR is required annually
Foreign rental property owners must file Form 1040-NR to report rental income, claim the net income election, and take allowable deductions. A timely return is essential to preserve the election.
- 4
FIRPTA applies on sale
When you sell U.S. real property, FIRPTA requires the buyer to withhold 15% of the gross sales price. You recover any excess withholding by filing a Form 1040-NR for the year of sale.
Your next move
Make the Section 871(d) election on your first Form 1040-NR, ensure your property manager or tenant is handling withholding correctly, and claim all allowable deductions against rental income.