US Taxes For Foreign Owners
The deadline for filing a US tax return is June 15th. The US tax year operates on a calendar year basis. Overseas owners of vacation homes are required to file a US tax return if you rent your home for more than 14 days in any year. So if you had more than 14 days of rentals between January 1st and December 31st last year you should file a 1040NR return by mid-June this year. Joint filing for married couples is not allowed and each part owner needs to file a 1040NR to claim their portion of the business deductions. The NR in the form number identifies that it is a return by a non-resident. US citizens and US green card holders have to file different returns by even earlier dates.
Don't panic if this is the first you have heard of it and the deadline looms. There is still time to avoid penalties, and if you read through to the end you will realise that for most people it is a paper exercise that involves the payment of no tax. Let's just address the June deadline issue so you can relax a bit. You need a US accountant or tax return preparer to do the job for you. We know few foreign owners who tackle the job themselves. The fee is typically between $150 and $300 per home, though it can be more if multiple returns have to be prepared. So find someone to do it for you. Your property manager or bank can probably suggest someone, If time is short, ask them to file an extension request for you. Extensions of three or six months are granted automatically, provided you request one. Your tax return preparer can file the request on your behalf, so there is nothing you have to sign that need delay the process.
The good news about the next part is that, judging from owner's comments, the US tax rules regarding rental income and expenses are very clear and uniformly applied by the IRS. Most owners are correctly advised by their tax return preparer that it is in their own interests to declare to the IRS that the rental activity is to be treated as a US business. This is done by completing form W-8ECI (previously called form 4224) each year, and sending it to your property manager, as well as making this election on your tax return. This form officially exempts your property manager from the legal obligation to deduct 30% from any rental income before sending you the balance. It also provides you with the right to deduct expenses, mortgage interest and depreciation from the income in arriving at a profit or loss figure for tax purposes.
Since the US tax system is a self-declaration system, it is up to you to gather all the information on income and expenses, and in consultation with your tax return preparer, compile the figures for the return. The IRS uses a sophisticated computer system to check all returns, and decide who should have their returns audited in person by an IRS inspector. Since the IRS also has a mass of other information from banks, mortgage companies, property managers, and the sundry people and organisations that provide you with services, it is a dangerous exercise to hope that they will never catch you if you decide that filing a return is too much bother.
As mentioned before it is largely a paper exercise. Apart from the proportion represented by your own occupancy of your Florida home, you can deduct all the running costs and maintenance, the costs you incur getting rentals, such as advertising and mailing details to enquirers, and even your tax preparer's fee. You can also deduct the interest part of your mortgage payments, and any insurance and property taxes that you may have to include with your mortgage payments. Your tax preparer will also compute a depreciation deduction that you are allowed to set against the rentals. The price you paid for your home, less the value of the land, can be depreciated over twenty seven and a half years. Similarly, the furnishings and equipment you put in to make it rentable, can also be depreciated. This is usually over a shorter period such as seven years.
By the time all your deductions are added up, you have to achieve an exceptionally high occupancy level before you become liable for US income tax. And any tax you have to pay in the US can in any event be set off against any UK taxes that result from the same rental activity, because the UK has a tax treaty with the USA. Other countries have similar treaties with the USA.