For individuals who are foreign to the United States (nonresident aliens for U.S. tax purposes), purchasing and renting U.S. residential and commercial real estate will require the filing of a US tax return 1040NR. A nonresident alien should consider the following issues before, during and after purchasing rental real estate directly in the United States.
Owning the Property as an Individual or Single Member LLC (SMLLC): An SMLLC is a limited liability company with only one member, the nonresident alien for purposes of this article. The SMLLC is beneficial because it provides a layer of liability protection for the nonresident alien from lawsuits from tenants. Additionally, we generally believe it is good practice to keep the bank account and assets related to the investment property separate from personal bank accounts and assets. The single member LLC approach allows for a clean and clear separation. This approach may require a little more upfront documentation, but does not complicate tax matters, because the owner may elect to complete his income tax return in the same manner as if the LLC did not exist. Although the SMLLC keeps the individual separate from the entity for legal purposes, the SMLLC is a ‘disregarded entity’ for tax purposes, unless the owners elects to be treated as a corporation. As a disregarded entity, the IRS looks through to the owner of the LLC to determine tax treatment of payments of income, withholding, etc. Any income received by the LLC will be reported by the owner, on his annual individual income tax return.
It is important to note that only the Single Member LLC is disregarded for federal income tax purposes. An LLC with more than one member (including a husband and wife who are each nonresident aliens) would be required to file a separate informational tax return in addition to each member being required to file individual income tax returns.
The tax return is due June 15 following the calendar tax year with the ability for a 4 month extension. The standard deduction is not available for a 1040 NR however one personal exemption is available. First time alien resident filers will need to file for an ITIN number which is a tax identification number for tax filing purposes. A 1040NR can only be filed for one individual so if two individuals invest in one property each individual will need to file a 1040NR for his share and income / expenses from the related investment .
