Is 30% Really Taken Off My US Rental Income, or Can I Elect Out of It? Yes, and Yes: The Section 871(d) Election

Short version: Form W-8ECI Explained: Effectively Connected Income · Section 871(d) Election: U.S. Rent Taxed on the Net

The default US rule for a non-resident's rental income is harsh: 30% of the gross rent, withheld at source, with no deduction for mortgage interest, property tax, insurance, management, repairs, or depreciation. On a property that nets little or nothing after expenses, the 30% is a tax on money the owner never keeps. Section 871(d) lets the non-resident elect to treat the rental income as effectively connected with a US trade or business, which means it is taxed on the net at graduated rates, like a US landlord's. The election is made on a return, it continues once made, it requires an annual return thereafter, and it can be applied retroactively for three years to recover withholding already taken.

Key takeaways

• Default: rental income from US real property paid to a non-resident alien is fixed or determinable income subject to 30% withholding on the gross amount; the withholding is the final tax; no return is required and no deductions are allowed.
• The election (section 871(d)): the non-resident elects to treat all income from US real property (rents, and gains from disposition) as effectively connected with a US trade or business; the income is then reported on a 1040-NR on Schedule E with expenses and depreciation, and taxed at graduated rates.
• How to make it: attach a statement to the 1040-NR for the first year, identifying the properties, stating that the election is made under section 871(d), and listing the income. The election applies to all US real property income, not property by property.
• Continuing: once made, it remains in effect for all future years until revoked (with IRS consent after five years, or by not filing for a year in some circumstances); a 1040-NR is required every year, even in a loss year.
• Stopping the withholding: provide Form W-8ECI (with an ITIN) to the tenant, property manager, or platform; they stop withholding and issue a 1042-S at zero.
• Retroactive: the election can be made on a late or amended 1040-NR for any open year (three years from the original due date); withholding for those years is recovered.

The default and why it hurts

Section 871(a) taxes a non-resident's US-source fixed or determinable annual or periodical income at 30% of the gross amount; rent is FDAP. The payer (a tenant, a property manager, a platform) withholds under section 1441 and remits; the owner receives a 1042-S; the tax is final. A $36,000-a-year rental with $30,000 of expenses pays $10,800 of US tax on $6,000 of net income: an effective rate of 180%.

The election

Section 871(d) permits a non-resident who derives income from real property in the US to elect to treat that income as effectively connected with the conduct of a US trade or business. The consequence: the income is taxed under section 871(b) at the graduated rates that apply to US residents, on net taxable income after the deductions allowed for effectively connected income (rental expenses, depreciation, state taxes). The owner files a 1040-NR reporting the rental on Schedule E. On the same $36,000 rental, the tax is on $6,000 less depreciation, likely a few hundred dollars or zero.

The election covers all of the owner's US real property income (all properties) and both the rent and any gain on sale. It is made by attaching a statement to the return: the owner's name and TIN, a statement that the election under section 871(d) is made, the location and description of each property, the owner's interest, the income and expenses, and a statement that the election applies to all US real property. The IRS instructions in Publication 519 describe the statement.

After the election

The election continues in every subsequent year. A 1040-NR must be filed each year, reporting the rental income and expenses, even if the result is a loss (a non-resident's rental losses are passive and suspended until sale; filing the return preserves them). Failing to file for a year does not automatically revoke the election, but the IRS can treat it as revoked in some circumstances, and an owner who wants to be certain files every year. Revoking the election requires IRS consent after five years.

Stopping the withholding

The election is made on a return, after the year; the withholding happens during the year. To stop it, the owner provides Form W-8ECI to the payer: the tenant (rare), the property manager, or the platform. W-8ECI certifies that the income is effectively connected (by the election), requires an ITIN, and instructs the payer not to withhold under chapter 3. The payer issues a 1042-S at zero. The owner's obligation to file the 1040-NR follows.

An ITIN is applied for on Form W-7 with the first 1040-NR or, for the W-8ECI, with the W-7 exception for withholding certificates.

Recovering prior withholding

The election can be made on a 1040-NR for a prior year if the return is filed within the refund period (three years from the original due date). An owner who has had 30% withheld for years can file 1040-NRs for the three open years with the election on the earliest, report the net income, and claim the withholding as a payment; the IRS refunds the excess. Years beyond the three are closed.

Canada

The Canadian return reports the rent on T776 with a foreign tax credit for the US tax under the election (the actual tax), not the 30% withheld; a Canadian who claimed 30% as a credit for a year they did not file a 1040-NR will be reassessed to the tax that would have applied.

Worked example

A Montreal couple bought a Tampa rental in 2022; the property manager has withheld 30% of $36,000 of rent each year; expenses are $30,000 and depreciation $9,000.

• Default, each year. $10,800 withheld; final.
• With the election. Net after depreciation: a $3,000 loss; US tax zero; loss suspended.
• Fix. ITINs on Form W-7; 1040-NRs for 2023, 2024, and 2025 (2022's original due date of June 15, 2023 plus three years is June 15, 2026: file it now if still open) with the 871(d) statement on the earliest; recover $10,800 per open year. W-8ECI to the property manager; withholding stops.
• Canada. T776 each year; the foreign tax credit was overclaimed at $10,800; amend to zero (and deduct nothing); the CRA will reassess anyway.

Official sources

"If an NRA owns or holds in interest in real property located in the U.S. and holds the property for the production of income, then the NRA can elect under Internal Revenue Code (IRC) 871(d) to treat all income from U.S. real property as effectively connected income with the conduct of a trade or business in the U.S." — Internal Revenue Service, Nonresident Aliens — Real Property Located in the U.S., https://www.irs.gov/individuals/international-taxpayers/nonresident-aliens-real-property-located-in-the-us

"You must give Form W-8 ECI to the withholding agent or payer if you are a foreign person and you are the beneficial owner of U.S. source income that is (or is deemed to be) effectively connected with the conduct of a trade or business within the United States." — Internal Revenue Service, About Form W-8ECI, https://www.irs.gov/forms-pubs/about-form-w-8eci

"This guide will help you determine your gross rental income, the expenses you can deduct and your net rental income or loss for the year. It will also help you fill in Form T776, Statement of Real Estate Rentals." — Canada Revenue Agency, Rental income, https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/t4036/rental-income.html

Practitioner note

The 871(d) election is a one-page statement that converts a 30% tax on gross into a tax on net that is often zero, and the number of Canadian owners paying the 30% because nobody told them is large. We make the election on the first 1040-NR, file the three open years to recover the withholding, and put the W-8ECI in the property manager's file the same week.

See also: For the full sequence of a Canadian move to Florida, see the Canada-to-Florida tax guide, and browse every cross-border tax topic guide, organized by situation.

Next step

Fairlight prepares the 871(d) election and 1040-NR for the open years, the ITIN application, and the W-8ECI to stop the withholding. See cross-border pricing or book a call.