When purchasing a U.S. home to rent out, buyers must assess critical federal tax rules, including withholding obligations, special tax elections, personal use limits, and deductible business expenses. According to the Internal Revenue Service, a nonresident alien who rents out a U.S. home is generally subject to a flat 30% withholding tax on the gross amount of each rental payment. Understanding how these regulations apply to your specific residency status and property usage is essential before finalizing any real estate transaction.

How does residency status affect rental income tax?

According to the Internal Revenue Service, a nonresident alien who rents out a U.S. home is generally subject to a flat 30% withholding tax on the gross amount of each rental payment. However, this is not the only option available to foreign buyers. According to the Internal Revenue Service, a nonresident alien can make a special election under Internal Revenue Code Section 871(d) to treat rental income as effectively connected with a U.S. trade or business, allowing them to deduct expenses and pay tax on net rental income.

Choosing this option introduces ongoing administrative responsibilities. According to the Internal Revenue Service, a nonresident alien who makes the Section 871(d) election must file Form 1040-NR for the year the election is made and for every subsequent year until it is revoked.

How does personal use impact tax obligations?

Buyers must carefully monitor how many days they spend in the property themselves. According to the Internal Revenue Service, if a rental property is used as a personal home and rented out for fewer than 15 days during the tax year, the rental income does not need to be included in gross income.

However, exceeding certain limits changes the classification of the property. According to the Internal Revenue Service, a taxpayer is considered to use a rental dwelling unit as a residence if personal use exceeds the greater of 14 days or 10% of the total days it is rented to others at a fair rental price.

What business deductions are available for landlords?

Operating a rental property involves ongoing expenses, some of which may be deductible. For instance, travel to and from the property for maintenance can be accounted for. According to the Internal Revenue Service, for the 2025 tax year, the standard mileage rate for operating a vehicle for deductible business purposes increased to 70 cents per mile.

For larger capital investments, different rules apply. According to the Internal Revenue Service, for tax years beginning in 2025, the maximum Section 179 expense deduction is $2,500,000, which is reduced if the cost of Section 179 property placed in service exceeds $4,000,000.

Additionally, high-income taxpayers must evaluate potential surtaxes. According to the Internal Revenue Service, taxpayers may be subject to a Net Investment Income Tax of 3.8% on the lesser of net investment income, which can include passive rental income, or the excess of modified adjusted gross income over the threshold amount.

Sources

  • Internal Revenue Service

Educational Disclaimer

This article is for educational purposes only and does not constitute individual tax, legal, or financial advice. Tax laws are subject to change and vary based on individual circumstances. Consult a qualified professional before making any investment decisions.

Educational content. Not an offer, an investment recommendation, or legal or tax advice.