If am not a Tax Resident, what Taxes do I pay if I Rent my Property in Florida?

January 12, 2021

Federal Taxes on Rental Income

The Internal Revenue Service is cracking down on non-resident alien landlords who fail to declare and pay taxes on rental income from properties held in the U.S. Just this last October 15th, the IRS’s Large Business & International Division (LB&I) announced a new audit campaign specifically targeting certain foreign landlords who don’t pay the required taxes on rental income from U.S-sourced properties.
But there are simple things most foreign property investors can do to ensure they remain in compliance, and even significantly reduce their income tax liability.

 

Effectively-connected income (ECI)

If you are running a trade or business in the U.S., you may be able to elect to treat your rental income from real estate as ‘effectively connected income,’ or ECI, under IRC §871(d).

 

Advantages of ECI

The advantage of making this election is that instead of getting taxed at 30% across the board, as FDAP income, ECI income gets taxed on net income after deductions and expenses.
So instead of getting taxed 30% on all your combined rental income, you would only pay income tax on profits after deducting your expenses, including:

 

  • Depreciation
  • HOA and condominium fees
  • Maintenance expenses
  • Renovations and improvements (spread over a number of years)
  • Property management fees
It is not uncommon for combined deductions to reduce the out-of-pocket tax liability for foreign landlords on U.S. rental property income from 30% to zero, by making the ECI election.
If you have net taxable income left over, ECI income also gets taxed at graduated rates, rather than a flat 30%.

 

Florida State Tax Considerations

There is no personal state income tax in Florida. But there is a corporate income tax, currently set at 4.458%. This tax is scheduled to reset to 5.5% on January 1st, 2022, unless the state legislature intervenes.

 

Additionally, Florida does impose a sales and use tax of 5.5 percent on commercial properties, and 5.7% on other types.

Short-term/Vacation/Transient Rentals

 

There is also a 6% state sales tax on residential short-term or transient rentals with lease terms than six months in duration. This tax generally applies to hotels, bed & breakfasts, timeshares, apartments and condominiums and the like. However, housing for full-time students is exempt. There’s also an exception for rentals to active-duty military personnel on orders. Military tenants must provide a copy of their orders, as well as a certificate of overflow.

 

Florida counties also impose an additional local option transient tax, which varies by county. You can find a breakdown here.

Don’t go it alone

The taxation of real estate income paid to foreign landlords is complex. Seemingly small errors can have major tax ramifications. It’s important for all non-resident alien property owners and partners in entities that own U.S. real estate to enlist the services of a qualified tax expert with experience in this aspect of U.S. tax law.
If you’re a non-resident alien who owns or is in the process of purchasing rental property here in the United States, contact us today for a confidential consultation.