Congratulations, Foreign investor, on your purchase of a good rental real estate property in the United States!
Of late, a lot of foreign clients have been consulting with me when they attempt to sell their rental real estate property. When interviewing them, I have been noticing that almost no one has been filing a US Federal Income Tax return, and the corresponding State Income Tax return, for the duration they have owned the property. While IRS has been lax in enforcing the rules, I have been hearing rumblings that IRS is looking to step up enforcement in this area and to go after such nonfilers. With the IRS, it is important for you to take the first step, than to act reactively after IRS approaches you!
In this article, I will concentrate on the responsibilities of the foreign rental real estate investor, who is buying a US property.
You will generally need a Property Manager to look after your property. Your closing agent can give you good recommendations. You may also search online for Property Managers in the area where you have purchased the property. This manager is responsible for collecting the rent and remitting 30% of the rent to the IRS as tax withholding.
Get an Individual Tax Identification Number (ITIN) from the IRS when you work with the property manager. This ITIN is required so IRS can credit the tax withholdings correctly into "your" account. Normally you need to send your original passport to the IRS and wait around 60 days. However, if you use the services of a Certifying Acceptance Agent such as myself, then you do not need to send the passport to the IRS.
File a US Federal (and State) Income Tax return every year you own the property. This ensures that your income is reported, and expenses you incurred (such as property taxes, repairs to the property, Management Fees, Property Manager monthly Fees etc.) can be deducted, and the total tax you pay is on the Net Amount (Gross Rent minus Expenses). If you wait too long (generally 16 months from the due date) to file your Income Tax return, IRS does not allow you to deduct expenses under IRC 874, and you will be required to remit 30% of the gross rental income as taxes. (This is not good and you definitely want to avoid that).
As you can see, a foreign investor has lots of responsibilities. If you need help in getting an ITIN, or need help with filing your rental real estate Income Tax return, please call us at 480-442-7063 or go online to set up a consultation.
Similarly, if you have already received letters from the IRS, and not sure how to proceed, please call us immediately. Many of the IRS letters are time sensitive, and require a timely response.
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