Non-Residents who rent their homes on a short-term basis a subject to a number of taxes. These include local and State (Tourist and Sales Taxes, respectively) and Federal Income taxes. It is not always easy to comply with the filing requirements but there is hope. If a realtor accepts payments on behalf of a homeowner, generally, they are liable for the sales and tourist taxes, along with the homeowner. Thus it has become common practice that realtors remit the tourist and sales taxes for all income that flows through their agencies. This is a great service that can cut down on a number of headaches for homeowners.
Additionally, for Federal Income taxes, there are two different types of taxation systems. The general rule is a gross taxation where the rental agent acts as a withholding agent and then pays over 30% of the gross rent to the Internal Revenue Service as a withholding tax. The homeowner then files a tax return where the income is taxed at a flat 30% tax rate. Against such taxes, the homeowner receives credit for the amounts withheld.
The seconds type of taxation system is “net taxation.” With this variation, the homeowner must make an affirmative election to treat the rental income as effectively connected with a US Trade or Business and thus receives the benefit of being able to deduct expenses from the income, taking depreciation deductions and calculating taxes based on graduated tax rates. A further benefit is that at the time of sale, unused expenses that have been carried forward as losses can be deducted from the gain from the sale of the real estate (if any).
In order for a realtor to be excused from withholding the 30% from the gross rent, the property owner must provide a Form W-8ECI to the realtor which must include the owner’s U.S. Taxpayer Identification Number.
Disclaimer: This Article is intended for general information and is not intended and does not provide any legal advice.