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Robin D.
Robin D., Senior Tax Advisor 4
Category: Tax
Satisfied Customers: 7225
Experience:  15years with H & R Block. Divisional leader, Instructor
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Under the US income tax Treaty with Sweden, what tax exemption

Resolved Question:

Under the US income tax Treaty with Sweden, what tax exemption is available to a married couple residing in Sweden (never visited the US) who jointly owns one residential condo (in Arizona) from which there is a monthly rental income (received through their property management company in AZ)? Should both the husband and the wife apply for TIN and complete W-8BEN to give to the said property management company? Can their daughter, holding a green card and living in the USA for many years, be of any help to her parents in avoiding the said formalities? Please give suggestions, ideas, and guidance.
Submitted: 12 months ago.
Category: Tax
Expert:  Robin D. replied 12 months ago.

Robin D :

Hello and thank you for using Just Answer,
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.
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.

Robin D :

Now please allow one moment while I look at the exact treaty because 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.

Robin D :

I saw nothing in the treaty that reduced the withholding amount or that changed it to only the net.

Robin D :

If you by filing the W8 have opted to have this as a business then you would file a US 1040NR and claim your expenses against the income each April.

Robin D :

If you were to give this property to your daughter she would need to report the gift but would not be taxed on the gift. She would also include the rental in her US return but would be allowed to use (to her benefit) any loss on the property.

Robin D :

You would have to check with your own tax advisor in Sweden about any possible taxation there should you decide to transfer the property to your daughter now as a gift.

Customer:

>If you by filing the W8 have opted to have this as a business

Robin D :

Did you request that they not withhold on the rents when you completed the W8?

Robin D :

If you did then you will be required to file a US return

Customer:

Please clarify. Not opting for any business. Just net rental income/loss from one tenant.

Robin D :

Did you request that the management company not withhold taxes on teh rents?

Robin D :

the rents* sorry

Customer:

No W8 completed yet. The rental property manager is requesting W*Ben to be filled out.

Robin D :

Ok, they need that by US tax law. They will be withholding 30% on the gross (before expenses)

Customer:

>Did you request that the management company not withhold taxes on teh rents?

Customer:

How to request?

Robin D :

You would have a treaty provision portion on the W8 BEN

Robin D :

But

Customer:

under Sweden treaty, zero percent withholding?

Robin D :

there is no treaty provision specific to US Sweden that allows for the management company to withhold on Net instead of gross

Customer:

Please clarify "withhold on Net instead of gross"

Customer:

Real estate property manager is hired by the Swedish couple.

Robin D :

Treaty provisions may allow for the withholding on rental after expenses are deducted

Robin D :

The US Sweden treaty does not allow for that

Robin D :

The management company would need to withhold 30% tax on the Gross (total rents received)

Customer:

30% tax on the Gross?

Robin D :

When you file the US 1040NR you can claim the expenses and lower the taxable amount

Customer:

That is quite a bit on about $1,xxx.

Robin D :

30% tax is withheld and paid to US by the management company

Robin D :

It is because the US can get it easier form a US management company then they could from a nonresident alien

Customer:

any suggestion in this kind of predicament?

Robin D :

There is no way around it unless you gift the property to your US daughter

Customer:

US management company hired by the married couple.

Customer:

what is no US management company is hired?

Customer:

is=if

Robin D :

US management company hired by the married couple. The US company has a US tax obligation

Robin D :

If no management company then the renter is supposed to withhold

Customer:

that is true.

Customer:

so TIN for both husband and Wife need to be applied for? just by the husband only?

Customer:

without TIN, W-8BEN cannot be completed.

Robin D :

Whoever owns the property as both would file the US nonresident return

Customer:

property in both names.

Robin D :

You can still send them the W8 (it stays with the company) and you are not claiming any treaty benefit

Robin D :

But

Robin D :

teh US tax return will need the ITIN of both'

Customer:

without ITIN, can W8 be completed and given to the property manager.

Robin D :

Yes

Robin D :

If you do not have one you leave that blank

Customer:

what to write in the box for ITIN?

Customer:

I see.

Customer:

then apply for ITIN for the annual(2013) tax return?

Robin D :

Yes, W7 with the 1040NR return
If you do not wish to deal with the US tax on real property used for income, you could gift the property to your daughter.

Customer:

or just add daughter's name on the title instead of gifting the whole?

Robin D :

Then you would still own US real property, nothing changes except percentage of income

Customer:

I see.

Robin D :

Your positive rating is always thanks enough.

Robin D :

We appreciate your continued support.

Customer:

to summarise, your answer is just fill out W8 leaving TIN blank for now.

Robin D :

Correct

Customer:

2 W8s?

Robin D :

Yes one for each of you

Customer:

one from husband and another from wife?

Robin D :

Yes

Customer:

Ok thanks.

Robin D :

You are most welcome

Robin D., Senior Tax Advisor 4
Category: Tax
Satisfied Customers: 7225
Experience: 15years with H & R Block. Divisional leader, Instructor
Robin D. and 3 other Tax Specialists are ready to help you
Customer: replied 12 months ago.

Is Form W-8ECI applicable? The Form W-8BEN is used for income that is not effectively connected. Is rental income on renting out a residential condo in the US considered NOT effectively connected?


 


There exists a US-Sweden tax treaty. Can you double check the US-Sweden tax treaty (IRS publication 515 shows 15% reduced rate withholding on dividend)? You stated, "The management company would need to withhold 30% tax on the Gross (total rents received)" Swedish Individuals who are liable to Swedish tax have to pay income tax in Sweden on their worldwide income. there will be double taxation if 30% is withheld. Is not it?

Expert:  Robin D. replied 12 months ago.
The potential for double taxation is covered under Article 23 of the treaty;
Sweden shall allow - subject to the provisions of the law of Sweden (as it may be amended from time to time without changing the general principle hereof) - as a deduction from Swedish tax on the income
of that resident an amount equal to the income tax paid in the United States.
So you will be allowed a deduction on your resident return not the US return.
Rental is effectively connected.
Customer: replied 11 months ago.

>Rental is effectively connected.


Should Form W-8ECI (effectively connected.income) be used then instead of W-8BEN?


Link for your info - stating no 30% withholding required if Form W-8ECI is used:


http://www.irs.gov/Individuals/International-Taxpayers/Foreign-Persons-Receiving-Rental-Income-From-U.S.-Real-Property

Expert:  Robin D. replied 11 months ago.
Technically you can not really use that to exclude withholding.
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.
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.
Then the W8 ECI would be used.
Customer: replied 11 months ago.

>merely passive activity such as a net lease


No, NOT a net lease at all in the current matter; lessee does NOT pay Real Estate taxes, repairs, and insurance in connection with the rented 3-bedroom apartment property. The property owner pays the said rental expenses and claims depreciation.


 


>If you do not have one you leave that blank


 


Does the W8 ECI REQUIRE an ITIN?

Expert:  Robin D. replied 11 months ago.
The W8 ECI does require an ITIN.

Then you could use the W8 ECI request no withholding based on the property being effectively connected. You would need the ITIN and you would file your US 1040NR form along with the Schedule E each year to show the rental income.

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