Questions frequently asked by Non Resident owners of Holiday Rental Homes in the United States
Presented below are ten questions frequently asked by foreign (Non-resident Alien) owners of rental homes in Florida. I hope the discussion will resolve some of your concerns with ownership of rental property in the United States.
1. What do I need to do to ensure compliance with the US tax and reporting requirements?
The US taxation system is a tiered system requiring filings in the county where your property is located along with state and federal filings. The county property appraiser's office levy a Tangible Personal Property Tax ('business rates') based on the value of the personal property (furnishings/appliances) used in your rental, the Return is filed by 1st April. This office also administers the annual assessment of Real Estate Taxes ('rates' paid for schools, police, fire etc) based on the value of your house and land on the 1st of January. These tax invoices are issued in November (most property owners with US mortgages will have an escrow account used by the mortgage company to pay your Real Estate taxes direct but the Tangible Tax will need to be paid by you).
The Sales & Tourist Development taxes are paid by your clients (i.e. you collect sales & tourist development taxes on top of the rental rates and then pay these funds over to the appropriate authorities). If you rent your property for periods less than six months you will be required to collect and pay sales tax to the State of Florida, Department of Revenue, on transient rentals (currently 6 percent). Your management company will usually collect and report all sales tax for you on the rentals they handle. Owners who rent their own properties should collect sales tax and communicate these actions to their management companies for reporting purposes, or pay the sales tax direct to the State of Florida. In addition to sales tax, a tourist development tax must also be collected and paid monthly to the county in which your property is located (up to seven percent in some counties). Sales tax and tourist development tax must be collected on all rental income from properties located in Florida regardless of where the rent is collected. Rental periods longer than six months are not subject to these taxes.
Federal income tax returns can be completed on your behalf upon receipt of your information and need to be filed by 15th June for the previous calendar year. Form 1040NR, US Non-resident Alien Income Tax Return, is the form on which all income and deductions related to your rental property will be reported. By filing Form 1040NR, you are electing to have income from your rental property deemed to be connected with US trade or business. This in turn allows you to deduct ordinary and necessary expenses and claim depreciation on the business assets.
2. Do I need a US equivalent of a UK national insurance number or reference?
Yes. The US Internal Revenue Service (IRS) requires 'Non-resident Alien' property owners to have an Individual Tax Identification Number (ITIN). A separate ITIN is required for each part owner. If you do not already have an ITIN you can apply with your US 1040NR tax return. Forms and instructions are provided with our services.
In addition, a Form 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, should be filed with your management company for each owner, and if requested, a W-8BEN filed with your US Bank/Mortgage provider.
3. What expenses can I offset against the rental income from my property?
Deductions include, but are not limited to: advertising, cleaning, maintenance, commissions, insurance, tax return preparation fees, management fees, mortgage interest, repairs, supplies, property taxes, depreciation and utilities. Most expenses that are ordinary and necessary in the operation of a rental property are deductible. If larger expenditures are required (i.e. new air conditioner), these items are capitalised and depreciated over future years.
4. I have heard that we can depreciate the cost of the house, furniture and large repairs. Is this true?
Yes, since the house (not including the land), furniture and some large repairs have a useful life greater than one year, they must be depreciated. Under the current laws, the cost of the house is 'capitalised' and deducted over a period of 27.5 years. Furniture, equipment and land improvements usually have a useful life of 5 to 15 years, depending on the specific item.
5. Can I deduct my airfare and travel expenses when I travel to Florida?
If your (owners only) trip is primarily for business purposes, the airfare and certain related travel expenses are deductible. These expenses might include car rental, local transportation to and from a meeting with your property manager and a meal over which a business discussion took place. The expenses must be allocated between business and time spent for pleasure.
6. If my spouse and I jointly own the property, will we have to file two returns?
Yes, because US Non-resident Aliens are not allowed to file a joint US tax return. If more than one individual owns the property then every owner must file a tax return, have an ITIN number and have a Form W-8ECI on file with their management company.
7. If I own more than one rental home in Florida, will I be required to file more than one tax return?
No. An unlimited number of rental homes can be reported on one Form 1040NR. Each rental property's revenue and deductions are reported separately on the Schedule E, Supplemental Income Schedule.
8. If I file a US Form 1040NR, do I need to report my holiday home rental income and deductions to the UK HMRC (Inland Revenue)? (Similar requirements exist for other countries).
Yes, if you are a UK citizen, you are required to report your 'world-wide income' to HMRC in the UK. However, there is a US/UK tax treaty, which eliminates any 'double taxation' between the two countries. You are eligible to receive a credit for taxes paid to the United States. Most 1040NR non-resident returns for rental property show a loss after depreciation and operating expenses are taken into account, therefore US income tax is seldom owed.
9. What happens when I sell my property?
As a non-resident alien, the IRS has no authority to collect US tax once you have left the US (i.e. sold your holiday home). To ensure collection of any tax that may be due, the IRS requires the withholding agent (i.e. usually a title company) to withhold 10% of the gross sale price from the seller's proceeds. However, due to depreciation, mortgage interest and other operating deductions, your rental property will probably have generated a tax loss when being rented. These losses are accumulated on Form 1040NR and carried forward to reduce future income or gain from the sale of the property. Professional advise should be sought prior to closing to file a Form 8288-B, Application for Withholding Certificate of Dispositions by Foreign Person's of U.S. Real Property Interest which will reduce or eliminate withholding under section 1445 or to file your subsequent calendar year Form 1040NR and report the sale of your property, the withholding tax is reported as a credit. This credit is applied to any tax due from gain on the sale of your property and any excess will be refunded to you. If you have no gain, all of your withheld tax will be refunded to you. Form 8288-B MUST be filed before closing to allow the Title Company to hold the funds. It can be filed prior to closing to initiate IRS processing and expedite the refund.
Generally, gain from the sale of long-term capital assets held for more than one year is subject to a maximum capital gains tax rate of 15%. However, a maximum 25% rate is imposed on long-term capital gain attributable to certain prior depreciation claimed on real property. This depreciation is referred to as 'unrecaptured Section 1250 gain'.
10. My management company says they are paying my taxes from the rental income?
Property management companies usually pay the state sales and tourist development tax they collect as this relates directly to a tax on rental income. They would not normally be involved in Federal or property taxes and would not normally be qualified to undertake income tax advice. In summary:
| Tax and forms | Due dates | Who would normally file? |
|---|---|---|
| Sales & Tourist Development Tax | Due by the 20th of the month following the calendar month of collection | Your management company or you, if you rent direct |
| Tangible Personal Property Tax, DR-405 | Due by the 1st April, invoices sent out in November of each year. First $25,000 exempt. | We provide this service for Florida Florida Property & Business Services LLC |
| Real Estate Tax | Usually paid from your escrow account held by your mortgage company by the 30th November of each year. | No filing required - assessed at Jan 1st - Budget in Sept. Bill sent November each year. |
| Federal Income Tax, 1040NR for each part owner | Due by the 15th June, usually no tax due but loses are carried forward and offset against future rental profit or capital gains on the sale of the property. | We provide this service Florida Property & Business Services LLC |
| Withholding on the sale of your US property (10% FIRTPA withheld by the title company at closing of sale) | Form 8288-B MUST be filed prior to the closing date of your property sale. Often the IRS retain a portion until the final 1040NR is filed. | We provide this service Florida Property & Business Services LLC |