Section 871(d) Election: U.S. Rent Taxed on the Net
Net rent at graduated rates instead of 30 percent of gross — how to make it and keep it
Reviewed by the Fairlight Accounting cross-border tax team — U.S. & Canadian Tax Desks
The section 871(d) election lets a nonresident who owns U.S. real property treat the rent as effectively connected income — taxed at graduated rates on net rent, after interest, property taxes, insurance, repairs, management fees, and depreciation, instead of 30 percent withholding on gross rent. For most Canadians with U.S. rentals, it cuts the tax dramatically.
On this page
Gross versus net
| No election | With the election | |
|---|---|---|
| Tax base | Gross rent | Net rent after expenses and depreciation |
| Rate | 30 percent flat (no treaty reduction for rent) | Graduated individual rates |
| Collection | Withheld by the manager or tenant | Paid with Form 1040-NR (W-8ECI stops withholding) |
| Return | None required if fully withheld | Form 1040-NR every year |
How to make it
Attach a statement to the first Form 1040-NR on which it applies — under Reg. 1.871-10(d)(1)(ii), it says the election is being made and lists all U.S. real property owned, the extent of ownership in each, its location, any substantial improvements, and any earlier elections or revocations — give the property manager Form W-8ECI (the W-8ECI guide), and file every year. The first election can be made — or withdrawn without consent — any time within the section 6511 refund-claim period for that year (generally three years after the return was filed), including on an amended return. After that it binds all later years and can be revoked only with IRS consent; once revoked, a new election can't be made before the fifth taxable year after the revocation year without IRS consent.
A caution
Deductions are allowed only on a timely filed return — under Reg. 1.874-1(b), one filed within 16 months of its original due date (sooner if the prior year's return wasn't filed and the IRS sends a notice first). A nonresident who files later can lose the deductions and be taxed on gross income, unless the IRS waives the deadline for a reasonable, good-faith failure to file. Annual filing matters.
Frequently asked questions
What is the section 871(d) election?
An election for nonresidents to have U.S. rental income taxed on the net at graduated rates instead of 30 percent of gross rent.
Should I make it?
Almost always — net rental income after expenses and depreciation is usually small.
How do I make the election?
With a statement on your first Form 1040-NR and a W-8ECI to your property manager.
What if I file late?
Deductions can be denied on returns filed too late — file on time every year.
Official sources
The IRS explains: “You may need to file Form 1040-NR if you: Were a nonresident alien engaged in a trade or business in the United States.” — Internal Revenue Service, About Form 1040-NR, U.S. Nonresident Alien Income Tax Return, https://www.irs.gov/forms-pubs/about-form-1040-nr
The IRS explains: “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-8 ECI, Certificate of Foreign Person's Claim That Income Is Effectively Connected With the Conduct of a Trade or Business in the United States, https://www.irs.gov/forms-pubs/about-form-w-8-eci
Next step
Fairlight Accounting is a cross-border accounting and tax practice with a U.S. Tax Desk and a Canadian Tax Desk. Our U.S. Tax Desk and Canadian Tax Desk handle section 871(d) elections, W-8ECI documentation, and annual Form 1040-NR rental returns for Canadian owners. See pricing or book a call.
Cross-border taxes, handled in one place
U.S. and Canadian filings prepared together by our U.S. and Canadian Tax Desks.
Book a free fit call