Rental income from real property located in the United States will always be U.S. source income subject to tax in the United States regardless of the foreign investor’s status and regardless of whether the United States has an income treaty with the foreign investor’s home country. The US tax rules that apply to ownership and dispositions of US real estate by foreign persons are different in some important respects from the rules that apply to US persons.

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Taxation on FDAP

Nonresident individuals or corporation are taxed on income that is effectively connected with a trade or business in the U.S. and U.S. source investment income. Fixed, Determinable, annual or periodical (FDAP) income is treated differently from the effectively connected income (ECI). Generally, non-residents are taxed at a flat rate on FDAP income from U.S. sources, but only if they are not effectively connected with U.S. trade or business. The 30% or lower rate applies to the gross amount and deductions are not allowed against FDAP income.  

 » Read more about: Fixed, Determinable, annual or Periodical (“FDAP”) Income  »