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Dear Tax Talk,
I have owned a house in Florida for 16 years and haven’t done a tax return for 12 years, when I left the country. Sometimes the house gets rented for a few months, but this is the first year the house had a full-time tenant and I will make a profit. My only bank account which is associated with the property has only ever shown transfers into the account from overseas to pay the mortgage, as it was empty. I’m concerned because someone told me I should do a tax return even though I have no income, job or profit. Is this right? I still live overseas and am not a U.S. citizen.
With the limited information you have provided, my answer is based on the assumption you will be classified for U.S. tax purposes as a nonresident alien and as such this requires you to report your rental property income on Form 1040NR, U.S. Nonresident Alien Income Tax Return.
The answer to your question is that both resident and nonresident aliens should file a tax return anytime there is rental income.
The general rule for nonresident aliens is that for rental property, you are taxed at a flat 30% (or lower treaty) rate on your gross income from U.S. sources that are “not effectively connected” with your U.S. trade or business. This may not be beneficial to you if you have tax deductions related to the rental property.
How resident and nonresident aliens owe tax:
Resident aliens, or foreigners who live within the U.S., are taxed in the same way as U.S. citizens.
The income of nonresident aliens falls into 1 of 2 categories:
- Income that is connected to a trade or business in the U.S.
- Income that is not connected to a trade or business.
The latter income is taxed at a flat 30%, or lesser, treaty rate.
Source: Internal Revenue Service
However, the IRS provides a special provision for owners of real estate that allows nonresident aliens to “choose” to treat income from the property as “income effectively connected with a trade or business in the United States.” If you make this choice, you are not only allowed deductions attributable to the property, but are also taxed on your net income at graduated tax rates.
To make this choice, you are required to attach a statement to your tax return or amended return for the year of choice which includes information regarding the property. Further details are provided in chapter 4 of IRS Publication 519, U.S. Tax Guide for Aliens.
Make sure you obtain an Individual Taxpayer Identification Number, or ITIN, if you do not have one and are not eligible to get a Social Security number, as it must be furnished on returns, statements and other tax-related forms. For details on how to obtain an ITIN, see IRS Form W-7, Application for IRS Individual Taxpayer Identification Number and its instructions.
All of the IRS publications, forms and instructions are available on www.IRS.gov.
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Thanks for the great question and all the best to you in getting everything straightened out with Uncle Sam.
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To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Taxpayers should seek professional advice based on their particular circumstances.