What is 30% withholding?
Depending on how you treat the investment property, IRS sometimes requires management companies to withhold 30% of GROSS rents to be withheld and sent to IRS.
How is 30% calculated on a net lease?
The 30 percent withholding tax applied to the gross income rather than the “net rent” received. Thus, the real estate taxes, operating expenses, ground rent, repairs, interest and principal on any existing mortgages, and insurance premiums paid by the lessee on behalf of the foreign owner-lessor, must be included in gross income subject to the 30 percent withholding tax.
30% withholding is bad for cash flow?
Picture yourself buying a 2 bedroom condo and which rents for $1,000/month. Your rental agent has to withhold $300 right off the top before you pay any expenses. What if AC broke that month and you had $2k in expenses for a new system? Tough, $300 gets withheld.
Common misconception
One of the biggest misconceptions and stopping blocks for Foreign Nationals, aka non-resident owners, when buying real estate in a US, is they think 30% withholding is unavoidable and mandatory. If management company does not know how to deal with the situation, or CPA does not know the forms to file in order to avoid it.
Form to file to avoid 30% withholding
I got this directly from a tax firm: In order to avoid the 30% being withheld by your property manager on the gross rental income, the nonresident owner must provide a Form W-8ECI to the property management company. The Form W-8ECI informs the property manager that the owner is electing to treat the rental activity as a U.S. trade or business and obligates the owner to file a U.S. income tax return to report the rental activity.
IRS Reference
For more detailed information visit the IRS Website
Disclaimer:
I am not a CPA and I am providing this for informational purposes only. You should verify this information with your own CPA to see if it’s applicable in your situation.