Can I skip the election and just let the manager withhold 30 per cent?

You can, but you then pay 30 per cent of the gross rent with no deduction for interest, tax, insurance, repairs or depreciation, and you still have to file to reconcile. Almost every owner is better off with the election.

Does the manager have to withhold if I am a foreign company?

Yes, the same rule applies, with Form W-8ECI from the company and the election under section 882(d); the return is then Form 1120-F.

What if the manager did not know I was abroad and never withheld?

The withholding agent is liable for the tax that should have been withheld, which is why managers ask every new owner for a W-9 or a W-8. Tell the manager before the first rent, not after.

Is the German tax office interested in my US rent?

Yes. The treaty leaves the taxing right with the United States, and Germany then applies its exemption or credit rules to what you declare at home; ask your German adviser how the US return feeds into the German one.

Checklist for German and other overseas owners of US rental property

If you live outside the United States and let a US property, the rent is US-source income and the person who pays it to you, usually your property manager, must withhold 30 per cent of the gross rent unless you make an election to be taxed on the net. Once you have made it, you file a US return every year, and your state may want a return and a withholding of its own. The order of the steps matters, because the election has to be in the manager's hands before the first rent is paid.

Before the first rent

Get a US taxpayer identification number. An individual applies for an ITIN on Form W-7 with the IRS; a foreign company uses an EIN. Without a number, no election can be made and no return can be filed.

Decide how you will hold the property: in your own name, through a US limited liability company, or through a company at home. Each changes the return, the withholding and, at home, how the income is taxed; take advice before you buy, not after.

Make the net-income election. By default the gross rent is taxed at a flat 30 per cent with no deductions. A nonresident may instead elect under section 871(d) of the Internal Revenue Code (section 882(d) for a foreign corporation) to treat the rental income as effectively connected with a US trade or business, and so be taxed on the net after expenses at the ordinary rates. The election is a statement filed with the return, and it stays in force for later years until revoked.

Give the manager Form W-8ECI before the first payment. This is the form that tells the withholding agent the income is effectively connected and that no 30 per cent withholding is due; it goes to the manager, never to the IRS. Until the manager has a valid W-8ECI on file, they must withhold.

Give the manager your address abroad and your taxpayer number for the forms they will file about you.

What the property manager must do

Withhold 30 per cent of every gross rent payment to a foreign owner who has not provided a valid Form W-8ECI, deposit it with the IRS, and report it on Form 1042 and Form 1042-S.

File Form 1042-S with the IRS and give the owner a copy by 15 March of the following year, whether or not anything was withheld, when the owner is a foreign person and the manager is the withholding agent; Form 1042, the annual return, is due the same day.

Keep the W-8ECI on file. It remains valid from the date it is signed until the last day of the third following calendar year, unless a change in circumstances makes it incorrect; diarise the renewal.

Check the state. California, for example, requires withholding on rent paid to nonresident owners above a threshold and reports it on its own forms; other states have no equivalent. The state where the property is, not the owner's country, sets the rule.

Every year

File the US return: Form 1040-NR for an individual, Form 1120-F for a foreign corporation. For an individual who received no wages subject to US withholding, Form 1040-NR is due on 15 June (the 15th day of the sixth month after the year ends); for one who did, 15 April. An extension is available on request but does not extend the time to pay.

Attach the section 871(d) election statement to the first return, and keep a copy; the return also reports the depreciation, which for residential rental property is taken over 27.5 years.

File the state return where the state taxes nonresident rental income, and claim any state withholding the manager remitted.

Report the US income at home. Treaties, including the treaty between Germany and the United States, give the United States the taxing right on US real property; the home country then exempts or credits according to its own rules, and the US return is the evidence the home tax office will want.

Keep the manager's monthly statements, the 1042-S, any state withholding statement and the closing statements from the purchase; the home-country return and any later sale rest on them.

When you sell

The buyer must withhold 15 per cent of the amount realised when the seller is a foreign person (FIRPTA), unless an exception applies: no withholding when the buyer will use the property as a residence and the amount realised is US$300,000 or less, and a reduced rate up to US$1 million on the same condition. The withholding is a prepayment; the real gain is settled on that year's Form 1040-NR.

The owner statement in Cuvanti shows gross rent, the manager's fee, expenses and any tax withheld as separate lines, month by month and for the year, so that the 1040-NR and the home-country return can be prepared from one document, and the manager's 1042-S figures reconcile to it. General information, not tax advice: rates and forms change, and the treaty position depends on your home country. A US tax adviser should confirm the election and the return before the first filing.