Taxes on US Real Estate: Rent, Property Tax and Sale

An apartment in Florida or a house in Texas doesn't bring you one tax authority, it brings you four: the IRS at federal level, the state depending on location, the county with its property tax, and the tax authority in your home country. Each has its own rules for rent, depreciation and sale. Here you'll see how they fit together, what choice you have on rental income, which deadline decides all your deductions, and what the tax treaty at home makes of it all.

1One property, four tax authorities

Real estate follows a simple international rule: the country where the property sits may tax the income from it. The US tax treaties set this out in Article 6 for income from immovable property and in Article 13 for gains on a sale. So if you live in Europe and rent out an apartment in Fort Lauderdale, the rent is first and foremost taxable in America.

In America, three levels share that income. The IRS taxes the rent and the gain on sale at federal level. The state can levy its own income tax, if it has one. And the county, the city and the school district levy property tax every year on the value of the house, whether you rent it out or leave it empty. After that, the tax authority at home looks at what reaches you.

This guide walks through the levels one by one. It assumes you hold the property personally. If you hold it through a company, the tax picture shifts; that's covered in Buying US real estate through an LLC. For a light-hearted introduction with a worked example, see "I've got a little place in Florida …".

2Rent: 30 percent on everything, or tax on the profit

For a foreigner not doing business in the US, rent starts out as ordinary US-source income. Section 871(a) of the Internal Revenue Code taxes such income, rent expressly included, at 30 percent of the gross amount. Expenses don't count, and neither does depreciation. On $24,000 of annual rent that's $7,200, even if almost nothing is left after property tax, insurance and management. The tenant or your property manager must withhold and remit that 30 percent.

Section 871(d) gives you an alternative. You can elect to treat all income from US real property held for the production of income as if it came from a US trade or business. You then pay tax only on the profit, at graduated rates, after deducting expenses and depreciation. IRS Publication 519 puts it exactly that way: the election lets you claim deductions, and only your net income from the property is taxed. It does not create a US trade or business.

The election has consequences you should know. It applies to all your US properties at once, not to a single one. It also applies to every following year until you revoke it with IRS consent, and after revoking you can't elect again until the fifth year. You make it with a statement attached to your return which, under 26 CFR § 1,871-10, contains a complete list of your US real property, your share in it, its location and any major improvements.

To stop withholding at source, you give the tenant or manager Form W-8ECI. The IRS provides it expressly for cases where you have made, or will make, the § 871(d) election. The form requires a US taxpayer number, and as an individual without a Social Security number that's the ITIN. Apply only once the first rent comes in, and you'll pay 30 percent on gross rent for the first months.

3The deadline every deduction depends on

Net taxation comes with a condition you won't find in any sales brochure. Under § 874(a), a nonresident gets deductions only by filing a true and accurate return. The regulations turn that into a deadline: the return must reach the IRS no later than 16 months after its regular due date (26 CFR § 1,874-1(b)). Miss it, and you lose the deductions for that year and are taxed on gross rent, at graduated rates instead of 30 percent, but without expenses or depreciation.

For nonresidents without US wages, the regular due date is June 15 of the following year (§ 6072(c)). The return is Form 1040-NR; rent and expenses go on Schedule E. You can deduct the usual rental expenses listed by the IRS in Publication 527, including mortgage interest, repairs, insurance, management, utilities and property tax. When you count as a nonresident and which form you file is explained in Resident or nonresident alien.

A note on homes you use yourself: the list of itemized deductions for nonresidents in Publication 519 does not include mortgage interest on a home you live in. Interest is deductible to the extent it relates to the rental. And if you rent out a vacation home for fewer than 15 days a year, under § 280A(g) that rent isn't taxed at all, but you can't deduct any expenses for it either.

4Depreciation: 27.5 years for the building

Depreciation is the single biggest deduction on a US rental. Section 168(c) sets a recovery period of 27.5 years for residential rental buildings, straight-line under § 168(b)(3). It starts from the middle of the month the property is ready to rent; the IRS calls this the mid-month convention. Land is not depreciated because, according to Publication 527, it doesn't wear out. So you split the purchase price between building and land, for example based on the county's assessment.

A worked example without rounding: if $300,000 of a $400,000 purchase price is for the building, that gives $10,909 of depreciation in a full year. With $30,000 in rent, $12,000 in running costs and this depreciation, a little over $7,000 is left to tax, instead of $9,000 in withholding on gross rent. The numbers are an example; the mechanics are law.

Depreciation comes back when you sell. The part of the gain attributable to depreciation taken is called unrecaptured Section 1250 gain and is taxed at up to 25 percent under § 1(h)(1)(E). In certain cases, § 168(g) provides the longer alternative period of 30 years. For foreigners, the gain on the sale itself is always treated as US business income under § 897(a), even without an election.

5Property tax: the county's tax

Property tax is usually what people mean when they search for "US property tax", and there's no single figure for the whole country. It isn't a federal tax, and in many states not a state tax either: it belongs to the counties, cities and school districts, which set their rates every year. What counts is the assessment, the rate and the due date in the specific location.

In Texas, the constitution prohibits a state property tax (Art. VIII § 1-e); it is levied only by the county, city, school district and other local taxing units. Property is assessed at market value as of January 1 (Tax Code § 23.01), and tax is due by the end of January of the following year. The homestead exemption, $140,000 of taxable value for school district tax, applies only to the home that is your principal residence (§ 11.13), not to a rental. How the deadline works is covered in the homestead exemption in Texas.

Florida caps increases: for residential property without a homestead, taxable value may rise by no more than 10 percent a year, except for school taxes (§ 193.1555); with a homestead the cap is 3 percent or the inflation rate, whichever is lower. Pay early and you get a discount, from 4 percent in November down to 1 percent in February (§ 197,162). In California, Proposition 13 caps the rate at 1 percent of taxable value plus levies for voter-approved bonds; taxable value rises by no more than 2 percent a year and is reset on a change of ownership, according to the State Board of Equalization. So a buyer doesn't inherit the previous owner's property tax but gets a new one.

On a rental property, property tax is an expense on Schedule E. The house itself secures it: in Texas, a lien arises on January 1 each year in favor of every taxing unit that levies the tax (Tax Code § 32.01). For Florida and vacation rentals, see Buying and renting out a house in Florida.

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6State income tax

On top of the IRS, the state can tax your rent, and this is where your choice of location really matters. Texas prohibits a personal income tax in its constitution (Art. VIII § 24-a). Florida has no personal income tax either; the Department of Revenue simply says there is no filing requirement. If you own property in these states as an individual, the federal return is all you file.

California and New York tax nonresidents too. Under Franchise Tax Board Publication 1031, nonresidents are taxed on California-source income, and real property is sourced where it is located. New York likewise counts income from real property in the state as nonresident income, reported on Form IT-203. When you sell, both states collect at the source: California withholds 3 1/3 percent of the sale price, and New York requires an estimated payment without which the county will not record the deed. Note also that a corporation pays corporate income tax in Florida, even though individuals are exempt; this matters if you hold property through a company.

7Selling: FIRPTA and withholding from the sale price

When you sell as a foreign person, the IRS secures its share before the money reaches you. Under § 1445, the buyer must withhold 15 percent of the sale price, not of the gain. Up to $300,000 there is no withholding if the buyer plans to live in the home; up to $1 million, under the same condition, it drops to 10 percent. The buyer reports and pays the amount on Forms 8288 and 8288-A within 20 days of the transfer.

The withholding is not a tax but a prepayment. You calculate the actual tax on the gain on Form 1040-NR, and the IRS refunds anything withheld in excess. If your expected tax is well below 15 percent of the price, for example because the gain is small, you can apply for a withholding certificate on Form 8288-B before closing; the IRS is to decide on the application within 90 days (§ 1445(c)). The process and forms are covered in detail in our article on taxes for US property owners.

If you hold the property through a US corporation, it sells as a domestic seller, and there is no withholding on the sale of the property. In return, the corporation pays 21 percent tax on the gain, and its shares also count as US real property interests as long as real estate makes up at least half of its assets (§ 897(c)(2)).

9What remains: inheritance and choosing the right structure

One tax is missing from this list because it only comes at the end: US estate tax. Owners who are not US residents get a credit of just $13,000 against it (§ 2102(b)), and US real estate always falls into the US estate. What this means for your heirs and which treaties help is explained in US estate tax for foreign owners.

Whether you hold the property personally, through an LLC or through a corporation under a foreign holding company changes almost every line of this article: who files, who withholds, which rate applies and what happens when you die. The decision is made before you buy, not after. You will find the comparison in Buying US property through an LLC.

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In short

• The US may tax rent from US property wherever you live. Without an election, 30 percent applies to gross rent; with the § 871(d) election, you pay tax only on the net income via Form 1040-NR.
• You only get deductions and depreciation with a timely return: no later than 16 months after the deadline, or they are lost.
• The building, not the land, is depreciated straight-line over 27.5 years. When you sell, the depreciation is recaptured at up to 25 percent.
• Property tax is a matter for the county and city. Texas and Florida have no personal income tax; California and New York tax nonresidents too.

How we help you

• US blocker for real estateBuying US property through a US C Corporation with a UK holding company.
• Your US Tax ReturnForm 1040 or 1040-NR, handled in English.
• ITIN ExpressYour ITIN through our special procedure, no tax return needed.
• Withholding taxW-8 forms, withholding and treaty benefits, done right.