Taxation of Rental Income Derived from Real Property located in the U.S. for Non-Resident Aliens Residing in Germany

Taxation under U.S. Tax Laws

The U.S. may tax rental income from real property located in the U.S. See Art. 6 (3) Germany-U.S. Income Tax Treaty.

The income of a non-resident alien is subject to U.S. income tax. Rental income associated with rental properties located within the U.S. is characterized as U.S. source income. In fact, Rental income from real property located in the U.S. is always U.S. source income. See IRC § 861(a)(4). Accordingly, U.S. sourced rental income is subject to U.S. taxation.

Pursuant to IRC § 6012, every natural person with a gross income that exceeds the personal exemption plus the basic standard deduction must file a tax return. For a non-resident alien, the declaration is carried out using Form 1040NR.

U.S. Withholding Tax

When distributing rental income to a non-resident alien, the withholding agent must withhold 30% of the payment amount (i.e., gross proceeds) and forward the withheld funds directly to the IRS, the U.S. tax authority. If the withholding agent (typically a rental agency, realtor, etc.) has fulfilled this obligation by submitting Form 1042-S a tax return may not be required. If the withheld taxes exceed the individual’s tax liability, a tax return is typically not required. However, should the withheld tax exceed the tax liability of the individual a tax return should be filed to recover any excessive amounts paid.

Taxation in Germany

Under Treaty law the rental income derived from real property located in the U.S is exempt from taxation in Germany. See Art. 23 (3) a) of the Germany-U.S. Income Tax Treaty. However, the income would be subject to a progression proviso. See Art. 6 in conjunction with Art. 23 (3) a) of the Germany-U.S. Income Tax Treaty and § 32b of the German Income Tax Act (EStG). Thus, the income must be declared on the income tax declaration.

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