Nonresident Aliens - Real Property Located in the U.S.

 

General Rule

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.

Special Election

If you, a nonresident alien, 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 elect under Internal Revenue Code section 871(d) to treat all income from U.S. real property as effectively connected income with a trade or business in the United States. The election 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 election  only for real property income that is not otherwise connected with your U.S. trade or business.

If you make the election, you can claim deductions attributable to the real property income and your net income from real property is taxed at graduated rates.

This election 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 election. As provided in Treasury Regulation 1.871-10(d)(1), make the initial election by attaching a statement to your return, or amended return, for the year of the election. Include the following in your statement.

  1. That you are making the election.
  2. Whether the choice is under Internal Revenue Code section 871(d) (explained above) or a tax treaty.
  3. A complete list of all your real property, or any interest in real property, of which you are the titular or beneficial owner, which is located in the United States. Give the legal identification of U.S. timber, coal, or iron ore in which you have an interest.
  4. The extent of direct or beneficial ownership in each such item of real property or interest in real property.
  5. The location of the property or interest therein.
  6. A description of any major improvements to any such property.
  7. The dates you owned the property.
  8. Your income from the property.
  9. Details of an identification of the taxable year(s) in which a revocation or new net election has previously occurred. 

This election stays in effect for all later tax years unless you revoke it.

Revoking the election. You can revoke the election without IRS approval by filing Form 1040X, Amended U.S. Individual Income Tax Return, for the year you made the election 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 election, you cannot revoke the election for that year. You may revoke the election 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).

Form W-8ECI, Foreign Person's Claim of Income Effectively Connected with the Conduct of a Trade or Business in U.S., is required to be given to any withholding agent or payer by the NRA for the first year the IRC 871(d) election is made.  Additionally, the NRA needs to ensure any withholding agent has an updated and valid Form W-8 ECI for any years the IRC 871(d) election is in effect.

References/Related Topics

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.