Hidden risk: Property managers and nonresident tax law

Is your organization fully IRS compliant?

Property ownership has become one of the primary vehicles for building long-term wealth in the U.S. This strong financial performance of U.S. property has attracted large amounts of foreign direct investment into the U.S. real estate market, with many of the new owners being foreign nonresidents.

These foreign nonresidents turn to property management companies to handle the operation of the rental property. However, unbeknownst to many property management companies, this role carries significant and often underappreciated legal consequences. When a PMC collects rent, disburses proceeds, and administers a property on behalf of a nonresident owner, it steps into a role that federal tax law treats with considerable gravity; that of a withholding agent.

As a withholding agent, property management companies are obligated to deduct and withhold 30 percent of the rental income paid to the nonresident owner. Failure to do so makes the property management company personally liable for the full amount of the tax that should have been withheld, as well as any interest and applicable penalties.

In this whitepaper, we examine the widespread compliance gap, Chapter 3 and the default withholding rule, the significance of the § 871(d) election, and the relevance of FIRPTA.