US Tax Rules/Laws for Nonresidents

If you are a nonresident doing business in America, buying a US business, buying US REAL estate (for personal use or investment), or making other US investments there are many complex US federal  and state tax rules you must follow. Failure to comply can result in large monetary penalties and possible criminal action.

READ MORE ABOUT THESE USA NONRESIDENT TAXRULES AND LAWS HERE.

If you are a US Nonresident and are buying a buisness, real estate or making investments in the USA or currently have US real estate, doing business in the US, or making investments we can help you avoid the expensive consequences of failing to comply with US tax law. Email us at ddnelson@gmail.com or phone US 949-480-1235.  As an attorney everything you discuss with me is totally private and confidential.

U.S. tax residency: Tax traps for the unwary

By Kyle Lodder, CPA

The United States continues to be an attractive destination for non-residents to invest their time or money, especially in real estate or business expansion. However, spending significant time in the U.S. could be a tax trap for the unwary.  It’s advisable for the nonresident to receive U.S. tax advice if spending considerable time in the U.S. and prior to obtaining a U.S. green card and/or U.S. citizenship.

The United States taxes the worldwide income of U.S. citizens, regardless of where he/she lives. A non-U.S. citizen is taxed only on his/her U.S.-sourced income, unless the person is deemed to be a tax resident of the United States.

A U.S. tax resident is also taxed on worldwide income. It’s worth noting that there is a difference between legal residency and tax residency under U.S. tax laws. There are many situations in which a person may not be a legal resident of the U.S. according to immigration laws, but is a tax resident according to U.S. tax laws.

A U.S. permanent resident/green card holder is generally deemed to be a U.S. tax resident. There are some exceptions for the green card holder, such as he/she has taken steps to be treated as a resident of another country under an income tax treaty or has formally surrendered a green card but hasn’t received official notification that the green card has been revoked.

Persons who meet the Substantial Presence Test are deemed to be a U.S. tax resident. This is an individual who was physically present in the U.S. for at least:

1. 31 days during the current year, and
2. 183 testing days pursuant to a three-year weighted average formula, determined as the sum of:
1. All the days in the U.S. in the current year, plus
2. 1/3rd of the days in the U.S. in the 1st prior year, plus
3. 1/6th of the days in the U.S. in the 2nd prior year.

There are some exceptions to avoid U.S. tax residency status for persons who meet the Substantial Presence Test. Two exceptions are the Closer Connection Exception and the Treaty Residency Tie-Breaker exception.

The Closer Connection Exception can be used to claim U.S. non-residency status for income tax purposes. This applies when an individual:

1. Was present in the U.S. for less than 183 days of the year, and
2. Can establish a tax home in another country, and
3. Can establish that he/she had a closer connection to that other country compared to the U.S., and
4. Timely files the IRS Form 8840 Closer Connection Statement with the IRS.

Occasionally, the individual doesn’t qualify for the Closer Connection Exception. For example, the individual was in the U.S. for more than 183 days during the year. In this case, the Treaty Residency Tie-Breaker exception could be used to claim non-residency for income tax purposes. This applies when an individual:

1. Was present in the U.S. for more than 183 days of the year, and
2. Is eligible to claim benefits under an income tax treaty between the U.S. and another country, and
3. Can establish that he/she qualifies as a tax resident of the other country under the tie-breaker rules, and
4. Elect the treaty benefit by claiming the position using IRS Form 8833 attached to a timely filed U.S. income tax return.

The United States has income tax treaties with a number of foreign countries. They are listed here. The tie-breaker residency provisions are typically dealt with in Article 4 of the treaty.

There is one potential trap for the unwary with the Treaty Residency Tie-Breaker Exception. The exception only applies to non-residency status for income tax purposes resulting in taxation on U.S. sourced income only. However, the exception doesn’t apply to the foreign disclosure regime. Thus, an individual who relies on the treaty exception is still treated as a U.S. tax resident for foreign disclosure purposes and is required to file the following forms if filing requirements are otherwise met: FBAR, Form 5471, Form 8865, Form 8858, Form 8621, Form 8938, Form 3520, Form 3520-A.

The tax residency rules discussed apply for income tax purposes. It’s important to distinguish these rules with the residency rules for estate and gift tax purposes. The estate and gift residency rules are not discussed here since they are beyond the intent of this article.

An individual would be prudent to seek assistance from a qualified U.S. international tax advisor. The rules are nuanced and complex and it’s easy to quickly find yourself out of bounds with the U.S. tax laws.

If you require additional information on any aspect of these complex rules, please contact Kyle Lodder at 360.599.4340 or kyle@loddercpa.com. Kyle Lodder is a Certified Public Accountant and is the owner of Lodder CPA PLLC, a U.S. international tax firm.

The material appearing in this communication is for informational purposes only and should not be construed as legal, accounting, or tax advice or opinion provided by Lodder CPA PLLC. This information is not intended to create, and receipt does not constitute, a legal relationship, including, but not limited to, an accountant-client relationship. Although these materials have been prepared by a professional, the user should not substitute these materials for professional services, and should seek advice from an independent advisor before acting on any information presented. Lodder CPA PLLC assumes no obligation to provide notification of changes in tax laws or other factors that could affect the information provided.

U.S. Estate Planning for Non-U.S. Persons - Nonresidents With US Property

By Kyle Lodder, CPA

Estate planning is often a forgotten element when non-U.S. persons plan their investment into U.S. real estate or business expansion into the U.S. As a result, many non-U.S. persons are unknowingly exposed to U.S. estate tax or other related land mines in connection with their U.S. investments due to incomplete planning focused on the corporate and/or personal income tax consequences. However, estate planning is an important piece of the puzzle and should not be forgotten when planning the investment or business expansion into the U.S.

For U.S. estate tax purposes, a “U.S. person” is an individual who is either 1) a U.S. citizen, or 2) domiciled in the United States. A person acquires U.S. domicile by being physically present in the U.S. and establishing intent to reside in the U.S. permanently. Citizens of other countries who aren’t domiciled in the U.S. are considered to be non-U.S. persons for U.S. estate tax purposes.

The U.S. federal estate tax is a “net worth” tax, based on values at the date of death of a non-U.S. person who owns U.S. situs property. U.S. situs assets are such things as:

• U.S. corporate stock, even if held in a brokerage account outside the U.S. (e.g. Apple stock held in your brokerage account in the UK)
• U.S. mutual funds
• U.S. pension plans and annuities, including 401(k) plans and IRAs; and
• Debt obligations of U.S. individuals, corporations, partnerships, trusts, or government.
• U.S. real property (e.g. vacation or rental home in the U.S.)
• Tangible personal property located in the U.S. at death (e.g. car at your vacation home)

For non-U.S. persons, $60,000 of U.S. situs property is exempt from U.S. federal estate tax. This amount is considerably less than the annually inflation-adjusted $5.49 million exemption allowed for U.S. persons. Any assets in excess of the $60,000 exemption are taxed at graduated rates between 18% and 40%.

However, the executor of the decedent’s estate should consider whether the U.S. has an estate tax treaty with the decedent’s country of residence at time of death to capture additional tax savings.

Here are several planning techniques that could be used to reduce U.S. estate tax exposure. This list is not an exhaustive list, but some planning considerations.

• Consider gifting assets directly or in trust (to spouse, children, family) to reduce taxable U.S. estate and to shield future growth from estate tax.
• Consider the advantage of basis adjustments when passing appreciated property to heirs at death.
• Consider liquidating foreign stock portfolio of U.S. stocks prior to death to avoid U.S. federal estate tax.
• Obtain a non-recourse mortgage on U.S. real property to reduce value of real estate subject to U.S. tax.
• Consider purchasing life insurance to pay for possible U.S. estate tax.
• Consider holding the U.S. situs property through a foreign entity such as a foreign corporation or foreign trust.
• Sell the U.S. situs property prior to death. There would be income tax in the U.S. and country of residence, but foreign tax credits should be available to prevent double taxation.

Inadequate U.S. estate planning can result in many unpleasant surprises. Here is a non-exhaustive list of items to watch out for:

• The impact of nothing having a Will in place or the Will doesn’t govern the assets in the U.S. This can result in either 1) complications for the executor administering the estate, along with conflict amongst the heirs, 2) difficulty processing the estate through the U.S. courts, or 3) inefficient U.S. tax consequences.
• Several U.S. states have estate tax and/or high probate fees. States don’t typically allow tax treaties to be used to avoid or reduce estate tax.
• Sound estate planning in the country of residency, but may actually be poor estate planning in the U.S. due to differing tax laws. Collaborative estate planning is the multiple jurisdictions is prudent.
• Failure to consider the U.S. gift tax, as it often is a significant different taxing approach compared to the country of residency. For example, gifting U.S. real estate to heirs results in U.S. gift tax but often results in a deemed disposition capital gain in the country of residency. The different types of tax may result in the inability to claim foreign tax credits to avoid double tax on the transaction.
• Failure to consider tax implications of heirs who are U.S. persons.
• Failure to consider the title of certain assets. The way an asset is titled can have varying impacts on the administration of the estate.

Estate planning is quite dynamic. There are many considerations in making a prudent estate plan that meets one’s desired legacy goals. There isn’t a one-size-fits-all solution. Planning to mitigate the U.S. estate tax implications is an important piece of the puzzle. The non-U.S. person who holds U.S. property is well-advised to enlist the guidance of a qualified U.S. International Estate Planning specialist.

If you require additional information on any aspect of these complex rules, please contact Kyle Lodder at 360.599.4340 or kyle@loddercpa.com. Kyle Lodder is a Certified Public Accountant and is the owner of Lodder CPA PLLC, a U.S. international tax firm. Kyle has the experience and knowledge to help non-U.S. persons owing U.S. property with their estate planning needs.

The material appearing in this communication is for informational purposes only and should not be construed as legal, accounting, or tax advice or opinion provided by Lodder CPA PLLC. This information is not intended to create, and receipt does not constitute, a legal relationship, including, but not limited to, an accountant-client relationship. Although these materials have been prepared by a professional, the user should not substitute these materials for professional services, and should seek advice from an independent advisor before acting on any information presented. Lodder CPA PLLC assumes no obligation to provide notification of changes in tax laws or other factors that could affect the information provided.

Nonresidents Doing Business in USA - The Legal and Tax Rules

By Kyle Lodder, CPA

The United States continues to be a large and stable economy and an attractive destination for non-U.S. companies to expand and grow their business. Even though it’s an attractive market for businesses to penetrate, foreign business owners often experience difficulty navigating the complex tax, legal and regulatory rules.

Therefore, it’s critical that one engages a qualified team of advisors as one enters the U.S. market. Proper planning will help avoid unexpected consequences and allow the business owner to preserve his or her time, money and mental space.N

A foreign corporation engaged in a trade or business in the United States is taxable on U.S. sourced business income. The activities need to be “considerable, continuous, and regular” to rise to the level of engaged in a U.S. business. The definition is quite broad that many companies with sales in the U.S. fit into this category.

The federal corporate income tax rate is comparatively high amongst westernized countries. Taxpayers reach the highest marginal tax rate of 35% at only $100,000 of corporate net income. As such, tax planning and entity structuring is a critical component of the planning for businesses expanding into the U.S.

A partnership is an option to reduce U.S. federal income tax. In this type of entity, the income is taxed at the individual partner level and not with the partnership itself. Individual partners pay tax at the individual income tax rates, which are significantly less in comparison to corporate income tax rates.

The partnership is required to withhold tax on behalf of the foreign partners. The withholding tax is quite high as its equal to the partners’ highest marginal tax rate multiplied by the foreign partners’ share of business income. The foreign partners are able to have much of this tax refunded when he or she files a U.S. income tax return. However, the drawback to this approach is the significant withholding taxes required which can cause a cash flow crunch in the business.

The U.S. federal estate tax should also be considered in the entity structuring planning. Business ownership through a foreign corporation is a technique to avoid attribution of the estate tax upon death to the non-U.S. business owner.

Sometimes a U.S. subsidiary corporation of the foreign corporation makes sense. This approach can provide enhanced flexibility to mitigate U.S. taxable income and to facilitate the repatriation of funds back to the home country. Various techniques are implemented with this structure, such as the use of intercompany loans with an interest charge, management fees or dividends. With this approach, careful professional guidance should be sought to avoid anti-abuse provisions within U.S. tax law.

Perhaps the most attractive option to mitigate the comparatively high U.S. federal corporate income tax is to take advantage of the income tax treaties between the U.S. and its trade partners. A list of the income tax treaties can be found here: https://www.irs.gov/businesses/international-businesses/united-states-income-tax-treaties-a-to-z. Most of these treaties include a taxpayer friendly provision which says that business profits of a foreign corporation are only taxable in the United States if they are attributable to a Permanent Establishment in the United States.

Permanent establishment typically includes a place of management, branch, office, factory, workshop or an agent who habitually exercises an authority to conclude contracts. A warehouse does not constitute a permanent establishment.

As such, the treaty may result in a foreign corporation only being subject to income tax in the foreign country and not subject to U.S. federal income tax. A federal income tax return would still be required to claim the benefits of the treaty. If the treaty-based return is not filed, the Feds can potentially impose federal income tax on the gross income earned in the U.S. without the benefit of any business deductions.

Yet, state tax compliance may be the most important tax issue to foreign businesses expanding into the U.S. States generally don’t follow federal tax laws or treaties. There are 13,000+ state and local jurisdictions in the U.S. that impose taxes on businesses. Each jurisdiction has their own set of rules and nexus standards. Nexus is defined as the minimum presence in a jurisdiction subjecting the company to tax in that given state or local jurisdiction. Oftentimes, companies with no physical presence in the U.S. can avoid U.S. federal income taxation through a tax treaty, but are still subject to state tax since the nexus standards are met.

There is not a one-size-fits-all solution for each non-U.S. business expanding into the United States. Tax is a critical consideration and proper planning can save thousands, even millions, of dollars and avoid many head-aches and pitfalls. It’s prudent for business owners to surround themselves with a qualified U.S. international tax professional to help navigate the complex rules.

This communication contains general information. Each individual investor should discuss their specific situation with a professional advisor before deciding on any investment structure.

If you require additional information on any aspect of these complex rules, please contact Kyle Lodder at 360.599.4340 or kyle@loddercpa.com. Kyle Lodder is a Certified Public Accountant and is the owner of Lodder CPA PLLC, a U.S. international tax firm. Kyle has the experience and knowledge to help Canadian investors weigh the benefits and risks associated with the different investment options.

The material appearing in this communication is for informational purposes only and should not be construed as legal, accounting, or tax advice or opinion provided by Lodder CPA PLLC. This information is not intended to create, and receipt does not constitute, a legal relationship, including, but not limited to, an accountant-client relationship. Although these materials have been prepared by a professional, the user should not substitute these materials for professional services, and should seek advice from an independent advisor before acting on any information presented. Lodder CPA PLLC assumes no obligation to provide notification of changes in tax laws or other factors that could affect the information provided.

Foreign Nonresident Investment in US Real Estate - The IRS Tax Rules

By Kyle Lodder, CPA

The purchase of U.S. real estate has been a long-time attraction for non-U.S. investors, often due to purchasing beautiful property at stable market prices.

Careful planning should be done before acquiring U.S. real estate in order to avoid unexpected tax consequences down the road. Among the items that should be considered are:

• The expected use of the property (primary residence, vacation home, rental property, investment property, development property or a combination of these uses),
• Citizenship and residency issues,
• Use of a corporation, partnership or trust for holding the property,
• Tax issues in both U.S. and resident countries, and
• The ultimate disposition of the property

Individuals who are not U.S. citizens and not U.S. residents are considered to be nonresidents for U.S. tax purposes. If an individual does not have a U.S. green card and spends less than 120 days in the U.S. annually, generally such a person will be a nonresident.

Nonresidents are subject to U.S. taxation only on their income sourced in the United States. If a nonresident purchases U.S. real estate and uses the property for personal use only, he or she is not required to file a U.S. income tax return in any year except the year of sale. If the property is used as a rental, the owner would be subject to tax on the rental income earned, and tax returns would be required even if there was a net loss from the rental activity.

When a nonresident chooses to sell U.S. real property, the gain from such a sale is usually subject to capital gains tax in the U.S. (capital gain treatment is generally not available to property developers). Currently the capital gains tax rate for nonresidents is 15 - 20%, although the gain may be completely tax-free if the gain from sale is minimal.

Withholding tax of the gross sales proceeds, typically in the amount of 15%, may be required upon the sale of the property. This withholding tax may be exempt, reduced or eliminated in certain situations. Any required withholding tax is credited against the federal tax liability computed on the nonresident federal income tax return.

If a nonresident were to die while owning U.S. real estate, the value of the real estate in excess of $60,000 would be subject to U.S. federal estate tax. Certain credits and treaty provisions exist to decrease the burden of this tax. Potential U.S. estate tax is a risk which must be properly weighed.

State taxes should also be considered. Many states impose an income tax, withholding tax upon sale and an estate tax. If a property is used as a rental, the nonresident will be required to file and pay state income taxes in addition to the federal taxes.

When considering purchasing real estate, the foreign investor should consider the use of a corporation, partnership, or trust as an entity type to own the property. There are advantages and disadvantages for each entity type, and the pros and cons need to be explored.

Owning U.S. realty through a foreign corporation generally shields the nonresident owner from the U.S. estate tax. However, corporations do not have the benefit of the lower preferential capital gain tax rates only available to individuals and certain trusts, and any gain from the sale of the property would be subject to corporate tax rates (currently a 35% maximum rate).

The use of a foreign or U.S. partnership to hold U.S. real estate may also be an option for certain foreign investors. The gain on the sale of real estate held by a partnership would be taxed to its individual partners at the lower capital gain tax rates. In certain circumstances though, the ownership of real estate through a partnership could potentially still leave the foreign owner exposed to U.S. estate tax.

Although the use of a U.S. limited liability company (“LLC”) is a common entity type for U.S. persons to own real estate, it can be advisable for foreign investors to steer clear from owning U.S. real estate through an LLC. This entity structure is generally tax inefficient due to differences in the U.S. and foreign tax law. This is especially true for Canadian investors.

Certain trusts can offer the benefits of the lower capital gain rates upon the sale of the property, and shelter the beneficiaries from U.S. estate tax. Such trusts must be foreign irrevocable trusts and require strict limitations on ownership and use of the property. This option is less desirable for many investors due to both giving up control of the property along with the complexity and administrative hassle of the arrangement.

There is not a one-size-fits-all solution for buying U.S. realty. Each investor is unique requiring balancing of many factors, including the owner’s intended use of the property, duration of ownership, plans for future disposition, and legal liability.

This communication contains general information. Each individual investor should discuss their specific situation with a professional advisor before deciding on any investment structure.

If you require additional information on any aspect of these complex rules, please contact Kyle Lodder at 360.599.4340 or kyle@loddercpa.com. Kyle Lodder is a Certified Public Accountant and is the owner of Lodder CPA PLLC, a U.S. international tax firm. Kyle has the experience and knowledge to help foreign investors weigh the benefits and risks associated with the different investment options.

The material appearing in this communication is for informational purposes only and should not be construed as legal, accounting, or tax advice or opinion provided by Lodder CPA PLLC. This information is not intended to create, and receipt does not constitute, a legal relationship, including, but not limited to, an accountant-client relationship. Although these materials have been prepared by a professional, the user should not substitute these materials for professional services, and should seek advice from an independent advisor before acting on any information presented. Lodder CPA PLLC assumes no obligation to provide notification of changes in tax laws or other factors that could affect the information provided.

Foreign Persons Receiving Rental Income from U.S. Real Property

U.S. real estate professionals and rental agents/property managers are encountering an increasing number of situations that involve foreign persons' acquiring U.S. real estate as a part-time residence, for investment or in some cases to conduct a U.S. business. The U.S. tax rules that apply to ownership and dispositions of U.S. real estate by foreign persons are different in some important respects from the rules that apply to U.S. persons.

U.S. real estate professionals must know how to properly deal with foreign investors in U.S. real estate in order to be in compliance with the federal tax laws affecting real estate transactions. They must be familiar with the rules that determine whether an individual or entity is to be treated as a U.S. person or a foreign person. In addition, they must also be familiar with the fundamentals of U.S. federal income taxation of foreign investors with U.S. rental income.  Under U.S. tax law, a taxpayer can depreciate the property. There are different depreciation rates for residential and commercial properties. This annual depreciation is deducted from income as an expense on an income tax return. However, it may be recaptured if the property is sold.

Foreign Property Owner’s Tax Return Responsibility During Ownership and Rental of Real Property Interest

Before agreeing to manage U.S. real property for a foreign taxpayer, a real estate professional or rental agent should discuss with the foreign client whether the rental income will be taxed as investment income through withholding, or on a net income basis as “effectively connected with a U.S. trade or business,” without withholding (although the owner may have to file estimated tax returns).  Rental income from real property located in the United States and the gain from its sale will always be U.S. source income subject to tax in the United States regardless of the foreign investor's personal tax status and regardless of whether the United States has an income treaty with the foreign investor's home country.

The method by which rental income will be taxed depends on whether or not the foreign person who owns the property is considered "engaged in a U.S. trade or business."  Ownership of real property is not considered a U.S. trade or business if it consists of merely passive activity such as a net lease in which the lessee pays rent, as well as all taxes, operating expenses, repairs, and interest in principal on existing mortgages and insurance in connection with the property. Such passive rental income is subject to a flat 30 percent withholding tax (unless reduced by an applicable income tax treaty) applied to the gross income rather than the "net rent" received. Thus, the real estate taxes, operating expenses, ground rent, repairs, interest and principal on any existing mortgages, and insurance premiums paid by the lessee on behalf of the foreign owner-lessor, must be included in gross income subject to the 30 percent withholding tax. The gross income and withheld taxes must be reported on Form 1042-S, Foreign Persons U.S. Source Income Subject to Withholding to the IRS and the payee by March 15 of the following calendar year. The payor must also submit Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons, by March 15.

If, on the other hand, the foreign investor is engaged in a U.S. trade or business such as the developing, managing and operating a major shopping center, the rental income will not be subject to withholding and will be taxed at ordinary progressive rates.  Expenses such as mortgage interest, real property taxes, maintenance, repairs and depreciation (accelerated cost recovery) may then be deducted in determining net taxable income. The nonresident must make estimated tax payments for the tax due on the net rental income, if any. The only way these expenses can be deducted, however, is if an income tax return Form 1040NR for nonresident alien individuals and Form 1120-F for foreign corporations is timely filed by the foreign investor.

Foreign individuals and foreign corporations may elect to have their passive rental income taxed as if it were effectively connected with the U.S. trade or business. Once such an election is made by attaching a declaration to a timely filed income tax return, there is no obligation to withhold even in a net-lease situation. Once made, the election may not be revoked without the consent of the IRS.  Unless the foreign investor has properly informed the property manager that the rental income is to be treated as "effectively connected income" by submitting to the property manager with a fully completed Internal Revenue Service Forms W-8ECI, Certificate of Foreign Person’s Claim for Exemption From Withholding on Income Effectively Connected With the Conduct of a Trade or Business in the United States, the property manager should withhold thirty percent (30 percent) of the gross rental receipts so as to avoid personal liability. A fully completed Form W-8ECI must include a valid U.S. tax identification number for the foreign landlord (in other words, the rental agent must withhold and remit the 30 percent tax to the IRS until this requirement is satisfied).  A real property manager who collects rent on behalf of a foreign owner of real property is considered a withholding agent and is personally and primarily liable for any tax that must be withheld. The liability of the withholding agent includes amounts that should have been paid plus interest, penalties, and where applicable, criminal sanctions.  Property managers who do not comply with these rules will be held liable (either individually or through their company) for 30 percent of gross rents, plus penalties and interest.  Also, property managers need to report annual rents collected on behalf of foreign landlords on Forms 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons, and 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding.  These are the equivalent of Forms 1096 and 1099-MISC but are for foreign owners.

To enforce the system of withholding, the Internal Revenue Code defines a "withholding agent" to be any person in whatever capacity (including lessees and managers of U.S. real property) having the control, receipt, custody, disposal or payment of income that is subject to withholding. Thus, a real property manager who collects rent on behalf of a foreign owner of real property is clearly considered a withholding agent. A withholding agent is personally and primarily liable for any tax that must be withheld. The liability of the withholding agent includes amounts that should have been paid plus interest, penalties and, where applicable, criminal sanctions. The statute of limitations does not start until a withholding return is filed by the withholding agent. Once the return has been filed, the statute of limitations begins to run at the later of two dates: the date of actual filing of the correct return or April 15 of the calendar year in which the return should have been filed. The withholding agent will remain liable if he actually knows that the foreign owner's statements are false. The withholding agent's duty of inquiry seems to be a "reasonably prudent test," measured by all facts and circumstances.

A nonresident who fails to submit a timely filed income tax return loses the ability to claim deductions against the rental income, causing the gross rents to be subject to the 30 percent tax.  Generally, the nonresident will need to retroactively file at least six years of delinquent income tax returns, or all prior year tax returns, if they have held the rental property for less than six years. However, the ability to elect to treat the rental income as effectively connected with a U.S. trade or business will be lost after 16 months from the original due date of the return, and the remaining back years may be subject to tax under the gross income method.  Rental income from real property located in the United States and the gain from its sale will always be U.S. source income subject to tax in the United States regardless of the foreign investor's status and regardless of whether the United States has an income treaty with the foreign investor's home country.

MORE ON FOREIGN OWNERSHIP OF US LLC OR LLPS -$10,000 PENALTY FOR FAILURE TO FILE FORM 5472

READ THE NEW RULES AND WHEN IT APPLIES TO YOU HERE    If you are a nonresident and own a US LLC or disregarded entity, and need help filing the complex form 5472, let us know. Failure to comply can result in a $10,000 penalty from the IRS. Email us at ddnelson@gmail.com.  We know tax law.