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FINANCE

NONRESIDENT ALIEN

RENTING U.S. REAL ESTATE

the foreign individual, not the LLC. The management company must
follow this treatment when filing information returns which report
by Michael Wiener, E.A. to the IRS payments the management company has made and the
T his article focuses specifically on foreign individuals who W-8, it is important to indicate to the management company that the
identity of the recipients of these payments. When filling out Form

own real estate directly as opposed to investing in U.S. real actual rental payments are made to the SMLLC. There should also be
estate funds.
a place for this on Form W-8. As for the ITIN on Form W-8, it will
Most real estate management companies will manage rental take 4-6 weeks to receive an ITIN (see below for how to apply for
properties on behalf of owners who live overseas. The management an ITIN). It is important to discuss with the management company
companies’ duties include, but are not limited to, finding desirable when they would like the ITIN to be obtained.
properties, assisting in purchases, finding tenants, collecting rent from Generally the application must be filed with the filing of the first
tenants, disbursing rent to the nonresident alien owner and paying annual tax return, Form 1040NR. But nonresident aliens may be able
the property expenses on behalf of the nonresident alien owner. These to file early under Exception 1(d). If applying under Exception 1(d),
management companies are required to report to the IRS any rents Form W-7 is accompanied by a signed letter on official letterhead
which are paid to nonresident alien owners. This typically places a tax from the management company verifying that an ITIN is required
burden on the nonresident alien investor. to make distributions that are subject to IRS information reporting
In most instances the owner of the property with be either an or federal tax withholding. If this letter cannot be provided, then the
individual or a Single Member LLC(SMLLC). SMLLC is a limited nonresident alien needs to wait to apply for the ITIN with the filing
liability company with only one member. The SMLLC is beneficial of initial Form 1040NR.
because it provides a layer of liability protection for the nonresident alien Form 1040NR will be filed for each year the nonresident alien owns
from lawsuits from tenants. Additionally, I generally believe it is good the property. The management companies provide basic statements of
practice to keep the bank account and assets related to the investment income and deductions which are used in the preparation of Form
property separate from personal bank accounts and assets. The single 1040NR. The due date of Form 1040NR is six months after the close
member LLC approach allows for a clean and clear separation. This of the tax year an automatic extension of six months can be granted
approach may require a little more upfront documentation, but does by filing Form 4868. However, the nonresident alien is required to pay
not complicate tax matters, because the owner may elect to complete any tax by the original due date. Most nonresident aliens hire a tax
his income tax return in the same manner as if the LLC did not professional in the United States.
exist. Although the SMLLC keeps the individual separate from the This article is meant to give U.S. nonresident aliens an overview of
entity for legal purposes, the SMLLC is a "disregarded entity" for certain issues involved with purchasing and renting U.S. Real Estate.
tax purposes. As a disregarded entity, the IRS looks through to the After the initial purchase and set up for the first year’s tax returns, the
owner of the LLC to determine tax treatment of payments of income, annual tax return process is relatively simple. If you have additional
withholding, etc. Any income received by the LLC will be reported by questions or concerns more specific to your own situation please
the owner, on his annual individual income tax return. contact Michael Wiener Tax and Accounting.
Rental income is FDAP (Fixed, Determinable, Annual, Periodic)
income, which the nonresident alien recipient should choose to treat
If you should have a topic that you would like me to
as EC (effectively connected to a U.S. trade or business). As EC,
discuss or if you should have a question, please feel free to
one can take deductions (depreciation, management fees, interest
call 239.403.4410 or e-mail me at
expense, taxes etc...) and the net income is reported on page 1 of
michael@mwtaxandaccounting.com.
Form 1040NR via schedule E and subject to the graduated tax rates.
Additionally, if treated as EC, there is no withholding requirement. I 4280 East Tamiami Trail
believe treating the rental income as EC is generally better from a tax Executive Suite 302-M | Naples, FL 34112
standpoint because the nonresident alien is taxed at graduated rates An enrolled agent, licensed by the US Department
and deductions are allowed to offset the gross rents received. of the Treasury to represent taxpayers before the IRS for
A nonresident alien should complete Form W-8ECI if treating audits, collections and appeals. To attain the enrolled agent
the rents received as EC. If the property is owned as an SMLLC, the designation, candidates must demonstrate expertise in
nonresident alien should complete Form W-8 using his name and taxation, fulfill continuing education credits and adhere to
ITIN, not the name and EIN of the SMLLC. Basically, in the case a stringent code of ethics.
of a single Member LLC, the IRS sees the recipient of the income as

74 Life in Naples | August • September • October 2017