How to Avoid Foreign Investor 30% Withholding Tax

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house tax papers and money

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.

How do you pay taxes on rental income as a foreigner?
Property management company will provide 1042-S to IRS and you. You will need that form to file U.S. tax return using form 1040-NR.

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.

How to Check if there are Open Permits on the house yourself

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Have you ever wondered if there are any open permits on the property you are buying?

Maybe you are thinking of selling and are in the process of preparing you house for sale and don’t want o see any last minute surprises which can delay closing and cost you time money and even make the whole deal fall apart.

close-expired-permits

It’s a good idea to run a search early to see if here is anything unusual. The status you want to see is “complete”. If a permit is “issued” or “expired” or “void”

Here are some links we use in Orlando area to search for open permits.

Orange County: https://fasttrack.ocfl.net/OnlineServices/Permit_Building.aspx

Seminole County: https://egov.seminolecountyfl.gov/Click2GovBP/SelectPermit.jsp

 

Bonus Info:
If you lost the permit or wind blew it away, you can also use this link to download and print a new copy.

UPDATE: Here is a tool to easily look up permits throughout the United States

https://www.buildzoom.com/map/nation-wide/

Orlando Market Pulse – Oct 2015

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ORRA sales
* Monthly revised sales. ** Includes listings with a status of “Active With Contract.”
Complete stats and data may be found under Market Info at orlandorealtors.org. Comments or suggestions? Contact Mike Blinn, Statistician.

Market Pulse™ data represents all listings taken or sold by ORRA brokers, regardless of location and is exclusive to residential property, which includes townhomes, duplexes, single-family homes, and condos. It does not include vacant land or commercial transactions.
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