In general, income from real property located in the United States that is owned by a nonresident alien is taxed at a 30% (or lower treaty) rate if it is not effectively connected with a U.S. trade or business. See Fixed, Determinable, Annual, or Periodical (FDAP) Income for more information.
If you have income from real property located in the United States that you own or have an interest in and hold for the production of income, you can choose under Internal Revenue Code section 871(d) to treat all income from that property as income effectively connected with a trade or business in the United States. The choice applies to all income from real property located in the United States and held for the production of income and to all income from any interest in such property. This includes income from rents, royalties from mines, oil or gas wells, or other natural resources. It also includes gains from the sale or exchange of real property and from the sale or exchange of timber, coal, or domestic iron ore with a retained economic interest.
You can make this choice only for real property income that is not otherwise connected with your U.S. trade or business.
If you make the choice, you can claim deductions attributable to the real property income and only your net income from real property is taxed.
This choice does not treat a nonresident alien, who is not otherwise engaged in a US trade or business, as being engaged in a trade or business in the United States during the year.
Making the choice. Make the initial choice by attaching a statement to your return, or amended return, for the year of the choice. Include the following in your statement.
- That you are making the choice.
- Whether the choice is under Internal Revenue Code section 871(d) (explained above) or a tax treaty.
- A complete list of all your real property, or any interest in real property, located in the United States. Give the legal identification of U.S. timber, coal, or iron ore in which you have an interest.
- The extent of your ownership in the property.
- The location of the property.
- A description of any major improvements to the property.
- The dates you owned the property.
- Your income from the property.
- Details of any previous choices and revocations of the real property income choice.
This choice stays in effect for all later tax years unless you revoke it.
Revoking the choice. You can revoke the choice without IRS approval by filing Form 1040X, Amended U.S. Individual Income Tax Return, for the year you made the choice and for later tax years. You must file Form 1040X within 3 years from the date your return was filed or 2 years from the time the tax was paid, whichever is later. If this time period has expired for the year of choice, you cannot revoke the choice for that year. You may revoke the choice for later tax years only if you have IRS approval. For information on how to get IRS approval, see Regulation section 1.871–10(d)(2).
Note: This page contains one or more references to the Internal Revenue Code (IRC), Treasury Regulations, court cases, or other official tax guidance. References to these legal authorities are included for the convenience of those who would like to read the technical reference material. To access the applicable IRC sections, Treasury Regulations, or other official tax guidance, visit the Tax Code, Regulations, and Official Guidance page. To access any Tax Court case opinions issued after September 24, 1995, visit the Opinions Search page of the United States Tax Court.