All foreign investors owning U.S property are responsible for paying taxes on any and all rental income they earn in the United States regardless of any tax treaties that may exist.

If you have applied and obtained your individual taxpayer identification number (ITIN), then you are good to go. Just fill out and submit a form W-8ECI to your property manager.

If you haven’t, please read:

The IRS holds your property manager responsible for withholding 30% of your gross rents to ensure that you will file a tax return. Your property manager must begin this withholding immediately. This is obviously very costly to you and also cumbersome to your property manager to administer. However, there is an alternative that will exempt you from the 30% gross tax.

You must obtain an individual taxpayer identification number (ITIN) and submit a form W-8ECI to your property manager. The W-8ECI exempts you from the 30% tax as it notifies the property manager (and the IRS) that you will be submitting an annual tax return. What’s the best way to get this accomplished? Contact Richard Hart at Hart and Associates. They are an IRS Certified Acceptance Agent and as such can facilitate your ITIN application in as little 4-5 weeks. Visit their website for more information, pricing and contact info: http://www.hartassociate.com/ITIN_INFORMATION.html

You will then receive a form 1042-S from your Property Manager along with your Annual Year End Statement no later than March 15th.

What is the difference between forms 1099 and 1042-S?

A 1099 form is used to report miscellaneous income, such as gross rent, for US residents and businesses only, whereas a 1042-S (Foreign Person’s U.S. Source Income Subject to withholding) is used to report income paid to a non-resident regardless of whether the payment is taxable. Unlike form 1099, form 1042-S is not due to be issued until March15th of every year.

The function of form 1042-S is to let the IRS know that a foreign person has earned income in the USA. For the purposes of the IRS, a foreign person includes a non-resident alien individual, a foreign corporation, a foreign partnership, a foreign trust, a foreign estate and any other person that is not a US person. When a foreign person or entity has earned income in the USA they must file an annual non- resident tax return. The IRS uses the 1042-S as a means to monitor tax filing compliance on the part of a foreign person or entity.

The final step is to file your Federal annual tax return which is due no later than 6/15 of every year. Hart & Associates can file this return for you as well and also submit the appropriate paperwork to the IRS which will allow you to be exempt from the 30% tax on your properties.