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 a nonresident alien has income from real property located in the United States that the nonresident alien owns or has an interest in and holds for the production of income, the nonresident alien 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.

A nonresident alien can make this election only for real property income that is not otherwise connected with the nonresident alien’s U.S. trade or business.

If a nonresident alien makes the election, the nonresident alien can claim deductions attributable to the real property income, and the nonresident alien’s 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), a nonresident alien makes the initial election by attaching a statement to their return, or amended return, for the year of the election. The following should be included in the statement:

  1. That the nonresident alien is 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 of the nonresident alien’s real property, or any interest in real property, of which the nonresident alien is 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 the nonresident alien has 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 the nonresident alien owned the property.
  8. The nonresident alien’s income from the property.
  9. Identification of any taxable year or years in which a prior section IRC 871(d) election was revoked, or a new section IRC 871(d) election was made

This election stays in effect for all later tax years unless the nonresident alien revoke it.

Form W-8 ECI, 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 nonresident alien for the first year the IRC 871(d) election is made and in any subsequent year when required. In providing a Form W-8 ECI to the withholding agent, the nonresident alien is providing under penalties of perjury that the rental income is effectively connected income with a U.S. trade or business and the rental income is includible in the nonresident alien’s income. This rental income is required to be reported on the nonresident alien’s income tax return filed with the IRS. Additionally, the NRA nonresident alien 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.

Revoking the election

A nonresident alien can revoke the election without IRS approval by filing Form 1040-X, Amended U.S. Individual Income Tax Return, for the year the nonresident alien made the election, and for later tax years. The nonresident alien must file Form 1040X within 3 years from the date the original 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, the nonresident alien cannot revoke the election for that year. The election may be revoked for later tax years only if IRS approval is received. For information on how to get IRS approval, see Regulation section 1.871–10(d)(2).

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.