Annual Tax Return filed to IRS
All foreign owners of US property, whom receive income from their property where IRS withholding has not been applied, must file a 1040NR US income tax return. The US tax year runs January to December and the tax returns are due to be filed to the IRS by June 15th the following year. Automatic extensions are available until October 15th, but these only extend the filing due date, not the tax payment due date. If income tax is due to be paid and this is not paid in full by June 15th late payment penalties and interest will be applied to the tax due.
Operating expenses incurred by the owner are offset against rental income and any losses carried forward within the tax return for future use. Allowable expenses include advertising, cleaning and maintenance, management fees and commissions, insurance, mortgage interest, utilities, repairs, supplies, and local taxes. Flights and car hire are also deductible for owners visiting to purchase, sell or maintain their rental property.
Expenses incurred during the year are pro-rated between the total number of personal use days and rental days. Only those apportioned to the rental days are allowable to be included in your tax return.
Personal use days are any days that you or your friends and family use the property without charge or for less than fair rental rate. Days that you stay in your property carrying out maintenance or repairs are NOT personal use days.
Where your personal use days are more than the greater of 14 days or 10% of your rented days, any losses are considered vacation home loss. Where your personal use days are no more than the greater of 14 days or 10% of your rented days, any losses are considered passive activity loss.
Both types of losses carry forward each year and are used to reduce any future years profit, thus reducing or preventing the payment of income tax. Remaining losses are released at the time of property disposal, but only passive activity losses can be used to reduce capital gain, and aid in the reduction of tax due at disposal.
The IRS requires that income producing property is depreciated. Most rental property is depreciated over 27.5 years and furniture over 5 years. By taking advantage of these deductions the majority of homeowners do not pay income tax during ownership.
Individual Taxpayer Identification Number (ITIN)
All foreign persons owning rental property in the US must have an Individual Taxpayer Identification Number (ITIN) in order to meet their US filing obligations. ITIN’s are tax processing numbers issued by the Internal Revenue Service.
The IRS issues ITINs to help individuals comply with the US tax laws, and to provide a means to process tax returns and payments for those not eligible for Social Security Numbers. The ITIN does not entitle the individual to claim Social Security benefits or to work in the US and it creates no inference regarding their immigration status.
As a non- resident owner of income producing property you must either pay withholding tax to the agent that is collecting income on your behalf, or you must file a US tax return to report the income received.
Withholding tax rates can be as high as 30%, determined by your country of residence and any tax treaty with the US. By filing an income tax return you are able to claim allowable expenses plus depreciation of the property, which help to prevent income tax being due for the current tax year and enable you to build up losses for possible use when the property is sold.
If you have had withholding tax applied to your rental income which has been sent to the IRS it can normally be reclaimed when you file your tax return.
Each owner included on the deed will be required to have an ITIN. If you purchased your property from a non- resident owner it is most likely that you will have been required to apply for an ITIN before, or at the time of closing. If you do not have an ITIN we can make an application to the IRS on your behalf.