General rule In general, income from real property located in the United States (U.S.) that is owned by a nonresident alien (NRA) 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 an NRA owns or holds in interest in real property located in the U.S. and holds the property for the production of income, then the NRA can elect under Internal Revenue Code (IRC) section 871(d) to treat all income from U.S. real property as effectively connected income with a trade or business in the U.S. The election applies to all income from real property located in the U.S. 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. An NRA can make this election only for real property income that is not otherwise connected with the NRA’s U.S. trade or business. If an NRA makes the timely election, the NRA can claim deductions attributable to the real property income, and the NRA’s net income from real property is taxed at graduated rates. This election does not treat an NRA, who is not otherwise engaged in a U.S. trade or business, as being engaged in a trade or business in the U.S. during the year. Making the election As provided in Treasury Regulation 1.871-10(d)(1), an NRA makes the initial election by attaching a statement to their income tax return, Form 1040-NR, U.S. Nonresident Alien Income Tax Return, or on an amended income tax return, Form 1040-X, Amended U.S. Individual Income Tax Return, for the year of the election. The following information should be included in the statement: That the NRA is making the election. Whether the choice is under IRC section 871(d) (explained above) or a tax treaty. A complete list of all of the NRA’s real property, or any interest in real property, of which the nonresident alien is titular or beneficial owner, which is located in the U.S. Give the legal identification of U.S. timber, coal, or iron ore in which the NRA has an interest. The extent of direct or beneficial ownership in each such item of real property or interest in real property. The location of the property or interest therein. A description of any major improvements to any such property. The dates the NRA owned the property. The NRA’s income from the property. Identification of any taxable year or years in which a prior section IRC section 871(d) election was revoked, or a new section IRC section 871(d) election was made This election stays in effect for all later tax years unless the NRA revokes 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 NRA in the first year the IRC section 871(d) election is made and in any subsequent year when required. In providing a Form W-8 ECI to the withholding agent, the NRA 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 NRA’s income. This rental income is required to be reported on the NRA’s income tax return filed with the Internal Revenue Service (IRS). Additionally, the NRA needs to ensure any withholding agent has an updated and valid Form W-8 ECI for any years the IRC section 871(d) election is in effect. Revoking the election An NRA can revoke the election without IRS approval by filing Form 1040-X for the year the NRA made the election, and for later tax years. The NRA must file Form 1040-X 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 NRA 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 Treasury Regulation section 1.871–10(d)(2). References/Related topics Publication 519, U.S. Tax Guide for Aliens Taxation of nonresident aliens Form W-8 ECI, Foreign Person's Claim of Income Effectively Connected with the Conduct of a Trade or Business in US 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 cases filed on or after May 1, 1986, visit the Opinions Search page of the United States Tax Court.
