1040-NR
FoundationsForm 1040-NR is the US Nonresident Alien Income Tax Return — the federal return filed by individuals who are not US citizens and do not pass the green-card or substantial-presence test, to report their US-source income. For a foreign investor who owns US rental property, this is the return that reports the rental income to the IRS each year.
How it works. A non-resident’s US income falls into two buckets, taxed very differently. FDAP income (passive income like dividends, and rent when no election is made) is taxed at a flat 30% on the gross amount, collected by withholding — no deductions allowed. Effectively connected income (ECI) — income from a US trade or business — is taxed at the normal graduated rates on net income, after deductions. Raw rental income defaults to the punishing 30%-of-gross treatment, but a non-resident can make a Section 871(d) election to treat the rental as effectively connected. That election, filed with Form 1040-NR, lets you deduct mortgage interest, property taxes, insurance, repairs, and depreciation — and pay tax only on the net profit. You need an ITIN to file, since you cannot get an SSN.
The Section 871(d) election is the whole game. Without it, a non-resident can be taxed 30% of gross rent with no deductions — which on a leveraged property can exceed the actual profit. With the election plus a 1040-NR, you deduct expenses and depreciation and are taxed on net income at graduated rates, usually a far smaller bill. This is cross-border tax work — use a CPA who specializes in non-resident real estate.
Example. A Mexican investor owns a US rental through an LLC. Using her ITIN, she files Form 1040-NR and makes the Section 871(d) election, deducting the mortgage interest, property tax, insurance, and depreciation. Instead of 30% of her gross rent, she is taxed on her net rental income at graduated rates — and when she eventually sells, the same return is where she reconciles the FIRPTA tax withheld at closing.
Learn how non-residents finance the property itself in DSCR loans for foreign nationals, and how to get the tax IDs you need in EIN & ITIN without an SSN.