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Welcome to the Wiesenberg & Co. Certified Public Accountants foreign property owner tax update.

When is a villa/flat owner obligated to file United States tax returns and what is the best way to structure these rental activities?

To start with, only rental property that is rented out for more than 14 days during a calendar year is subject to taxes.

If a property is subject to taxes, the general rule for foreign filers in the United States is that a flat 30 percent of their gross income has to be withheld by those making the payments. In most cases this means the property manager would withhold that amount. The foreign filer would not be able to subtract any expenses from the rental income. The 30 percent withholding from gross receipts would cover the entire tax burden, and no tax return would need to be filed.

The way to avoid this heavy tax is to structure the villa rental as a business. Once the proper elections are completed, withholdings are no longer required. Even better than that, all expenses relating to rental income can be deducted against revenue (next month we will talk more about these deductions). Using this method a tax return (in most cases form 1040NR) needs to be filed with the Internal Revenue Service. It is beneficial in almost all situations to use this second method. With effective tax guidance many villa/flat owners find they pay no American taxes at all.

Reminder: The US tax year is from January to December - so now is the time to start gathering your information.

Tax tip of the day

United States taxing authorities allow depreciation on the building used for rental activities. This means that although your property is appreciating in value you are still entitled to a tax write off. It is important; however, that certain correct choices of how much to depreciate are made at the initiation stages so that deductions are not wasted.

Please contact us with any comments or questions you may have.

(This newsletter is designed to be of general interest. The specific techniques and information discussed may not apply to you. Before acting on any matter contained herein, consult with your professional advisor.)

1040NR | United States Tax Return | American Taxes | United States taxes