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Nonresident Rental Income: Net Elections, Form 1040NR, Form 5472, Passive Losses, and Current IRS Campaign

Note: CLE credit is not offered on this program

Recording of a 110-minute CPE webinar with Q&A

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Conducted on Tuesday, January 19, 2021

Recorded event now available

This course will cover the tax rules for nonresidents aliens (NRAs) owning rental property in the U.S. Our foreign tax expert will explain making the net election, Form 1040NR and other U.S. foreign reporting requirements, the current IRS initiative targeting these properties, and the limited relief available for missed net elections.

Description

Passive ownership of rental property by NRAs usually does not rise to a sufficient level of activity to qualify as operating a trade or business in the U.S. For NRAs, not filing a return reflecting these, often passive losses, can have devastating tax results.

Gross rental income earned by a nonresident is taxed at a flat rate of 30 percent. The use of graduated rates available in the tax tables and deductions related to rental expenses are not allowed for NRAs. However, making a "net election" under Section 871(d) allows foreign investors to treat the property as effectively connected with a U.S. trade or business. This election almost always saves a foreign investor substantial tax dollars. It allows using the same tax brackets used by U.S. residents and allows the deduction of rental expenses, including depreciation and real estate taxes.

Often NRAs choose to place rental properties in single-member LLCs, which requires additional foreign reporting, namely Form 5472. Noncompliance comes with a hefty $25,000 penalty. Also, the IRS recently announced its latest compliance campaign targeting NRAs, not reporting rental income from U.S. properties. Understanding the tax ramifications of real estate owned by nonresidents is critical for tax professionals working with foreign investors.

Listen as our international tax expert explains the tax considerations and consequences of real estate rental in the U.S. by NRAs.

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Outline

  1. Reporting U.S. rental income: Form 1040NR
  2. Net elections and missed net elections
  3. LLCs and additional foreign reporting requirements
  4. Property sales
  5. Current IRS campaign

Benefits

Our international tax expert will explain:

  • How and when to make a net election under IRC Section 871(d)
  • When Form 5472 is required to be filed by nonresidents
  • What relief is available for missed net elections
  • What the IRS expects to find during its audits of foreign owned rental property
  • Passive loss considerations for foreign owned rentals

Faculty

Santa, Mishkin
Mishkin Santa, JD, LLM, TEP
Principal, Director of International Tax
The Wolf Group

Mr. Santa focuses his practice on repatriation tax, as well as individual income tax compliance, estate, gift &...  |  Read More