Here’s the basic rule for nonresidents who have U.S. real estate. If it’s rental or investment property, file tax returns. You file on a calendar year basis. The deadline is June 15 of the following year. An extension is available.
Exceptions: purely personal use property (vacation homes) or raw land held for long term speculation (I won’t go into it here–too techie). These people need not file a tax return until the year they sell.
Here’s what happens if you don’t file. If you’re 16 months past that deadline (the counting rule is actually more complex than that, but let’s use the simplified version for now), you are taxed on your gross rental income at 30%, instead of on your net rental income at normal graduated income tax rates.
Example. You have an apartment building with a mortgage. You pay property taxes. You pay a manager. You fix the plumbing. The rental income barely covers the expenses.
If you’re late on the tax returns, you will pay tax at 30% of your rental income, with no allowance for any of those expenses.
If you file on time, you will pay tax on your net rental profit, which is probably close to zero. And counting depreciation of the building, you might even be running at a loss for tax purposes.
Bad. But how will THEY (the taxman) ever find you? Simple. Sooner or later you are going to sell your property or you are going to die. At that moment a tax return will be necessary. Otherwise you will be forced to walk away from a very large withholding tax (if you sell).
You don’t care if you die, of course. But I’ve seen the impact of this: the back tax liabilities completely consume the value of the real estate. The heirs receive a worthless inheritance.
The IRS has some latitude to waive this strict requirement. But sooner or later the chickens will come home to roost. Why not deal with it now?