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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 10432
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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I own a property in Brooklyn, NYC. It is rented out, monthly

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I own a property in Brooklyn, NYC. It is rented out, monthly 4300 plus utilities/ management etc

I live in Germany and I am a German citizen.

Do I have to pay tax on the rental income in the US?

Lane :

Hi,

Lane :

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

Lane :

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

Lane :

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.

Lane :

It sounds as if this is all passive ... and therefore, is not considered a U.S. trade or business... hence you re not subject to as a foreign peron

Lane :

As a a foreign person for US tax purposes, the income earned is treated as earned directly by the foreign person. Such income is not subject to U.S. taxation so long as the foreign person did not perform his services or sales activity in the U.S. himself or through an employee or agent.

Lane :

Firther, from the US/Germany double taxation treaty:

Lane :

A person who is liable to tax in a Contracting State only in respect of income
from sources within that State or capital situated therein or of profits attributable to a
permanent establishment in that State will not be treated as a resident of that Contracting
State for purposes of the Convention.

Lane :

Hence, if you are paying tax on this income in Germany, you are not liable for tax in the US, given the information you have provided.

Lane :

Questions?

Lane and 2 other Tax Specialists are ready to help you

Thanks Max.

Here the IRS guidance on this: http://www.irs.gov/Individuals/International-Taxpayers/Foreign-Persons-Receiving-Rental-Income-From-U.S.-Real-Property


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If you'd like to work with ME again just say "For Lane only," at the beginning of your next question.


Thanks again,

Lane


Max,

My apologies ... although I provided the IRS guidance, above, as I was reading the tax treaty, I was able to see that you will not be taxed twice on this income and in re-reading my last couple of paragraphs, it appears that I was saying that you did not have to REPORT or pay US tax at all.

I must correct ...


You have two choices.

You can have your U.S. rental income subject to a 30% withholding tax and you have no further requirement to file a U.S. tax return or pay additional U.S. taxes.

You may, however, choose to consider your rental income as an effectively connected U.S. business activity. That requires you to file a U.S. tax return and itemize your rental income and expenses. See Publication 519, “Tax Guide for Aliens”, for information. Remember, filing a U.S. return requires an Individual Tax Identification Number (ITIN - Form W-7)
.
If you do this, you can then deduct rental expenses 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, again, is if an income tax return Form 1040NR for nonresident alien individuals.

The IRS office in Frankfurt will accept tax returns, tax payments, W-7 applications, and taxpayer correspondence. Their mailing address is as follows:

 

U.S. Consular General Frankfurt
Internal Revenue Service

Giessener Str. 30
60435 Frankfurt/Main
Tel: 49 69 7535-3834 or 3823
Fax: 49 69 7535-3803
Email: [email protected]

For immediate assistance from a taxpayer specialist, you can call, fax or email the International Customer Service Site located in Philadelphia. The Service Site is open Monday through Friday, for 17 hours each day, from 6:00 AM to 11 PM, Eastern Time. The customer service representatives there can be contacted as follows:

 

Tel: 001 215 516 2000
Fax: 001 215 516 2555


http://www.irs.gov/localcontacts/article/0,,id=101292,00.html


Inquiries regarding taxpayer identification numbers should be made at
Tel: 001 215 516 4846
Fax: 001 215 516 3271





So, again ,my apologies for not being clear.

As per the tax treaty discussion above, you will NOT have to pay tax to BOTH US and Germany. However, you will have to pay US tax and then claim credit for those taxes paid, in Germany.

2012 Form 1040NR - Internal Revenue Service



OR if the income is collected by an agent in the US and should be witholdng the 30%, you can submit form W8-BEN to the withholding agent to claim exemption from, withholding as a resident of a foreign country with which the United States has an income tax treaty.

Form W-8BEN


Let me know if you have questions,

Lane