Rental Income Net Election for Non-Residents: 30% vs Net

A non-resident who rents out U.S. property is taxed at a flat 30% (or lower treaty) rate on the gross rent, unless the owner makes the rental income net election. That election treats the rent as income effectively connected with a U.S. trade or business, so rental expenses can be deducted and only the net amount is taxed at graduated rates.

This guide explains both methods using IRS Publication 519. It covers which income the choice reaches, what Form W-8ECI does, and how the election is reported on Form 1040-NR.

How U.S. rent is taxed without the net election

Publication 519 splits a nonresident alien’s U.S. income into two groups. Income effectively connected with a U.S. trade or business is taxed, after allowable deductions, at graduated rates. Those are the same rates that apply to U.S. citizens and residents. Income that is not effectively connected is taxed at a flat 30% or lower treaty rate.

Rent falls into the second group by default. The IRS lists rental income as fixed or determinable income when the owner does not claim it as effectively connected. Tax on that income is withheld at a 30% rate or a lower treaty rate. In the IRS example in Publication 519, the 30% rate applies to the full $10,000 of rent, with no expenses subtracted first.

What the net election changes for a non-resident landlord

An owner of U.S. real property held for the production of income can choose to treat all income from that property as effectively connected with a U.S. trade or business. The owner does not need other U.S. business activity to make this choice.

Once the choice is made, the rent can be offset by certain rental expenses. Publication 519 points to Publication 527 for which expenses qualify. Depreciation is one of the items in play. The IRS describes it as an amount deducted to recover the cost or other basis of a business asset, and the amount depends on the property’s cost, when it was first used, the recovery period and the method chosen. Any net income left after these deductions is taxed at graduated rates. For more on which costs count, see this guide on ITIN and rental property expenses.

Which income the election covers

The choice is not made property by property. Publication 519 says it applies to all income from real property located in the United States and held for the production of income, and to all income from any interest in such property. That includes:

• Rents
• Royalties from mines, oil or gas wells, or other natural resources
• Gains from the sale or exchange of timber, coal, or domestic iron ore with a retained economic interest

Gains and losses from selling a U.S. real property interest follow a separate rule. The IRS treats them as effectively connected with a U.S. trade or business whether or not the rental election was made. The election is aimed at the ongoing income the property produces while it is held.

Form W-8ECI or Form W-8BEN: what the payer receives

The rent payer, usually the tenant or a property manager, acts as the withholding agent. Publication 519 says a nonresident alien gives Form W-8BEN to the withholding agent so that tax is withheld at the 30% (or lower treaty) rate. If the income is effectively connected with a U.S. trade or business, the owner gives Form W-8ECI instead.

The full name of Form W-8ECI is Certificate of Foreign Person’s Claim That Income Is Effectively Connected With the Conduct of a Trade or Business in the United States. For a landlord who has made the net election, it is the form that tells the payer the rent is claimed as effectively connected income. Owners who are unsure whether they need a U.S. taxpayer number for these forms can read do you need an ITIN for U.S. rental income.

How the election is reported on Form 1040-NR

Publication 519 sets out the reporting steps in this order:

1. Report the rental income and expenses on Schedule E (Form 1040).
2. Enter the net rental income or loss from Schedule E on Schedule 1 (Form 1040), Part I, line 5.
3. Attach Schedule 1 and Schedule E to Form 1040-NR.
4. For the first year of the choice, also attach the election statement the IRS describes.

Timing matters. The IRS says an owner with no U.S. business activity who chooses to treat real property income as effectively connected must timely file a true and accurate return to take any allowable deductions against that income. The When To File rules in Publication 519 decide what counts as timely. Owners still arranging a taxpayer number can review how to get an ITIN for rental income.

Gross basis versus net basis side by side

The trade-off is between simplicity and the tax base. Under the gross method, the IRS example shows a landlord whose only U.S. income was $10,000 of rent, with tax properly withheld and reported on Form 1042-S, who did not have to file Form 1040-NR. Under the net method, the landlord files a return each year but is taxed only on what remains after expenses.

Frequently asked questions

Have your 1040-NR prepared by Nolly.com

Nolly.com is an IRS Certifying Acceptance Agent in Toronto. We prepare your U.S. non-resident tax return from your income documents, and you review and sign it before we file. Get your 1040-NR prepared. Form 1040-NR preparation at Nolly.com starts from US$199.

Source: IRS.gov, Publication 519, U.S. Tax Guide for Aliens.

This guide is general information, not tax advice. Rules change and every situation is different, so check the IRS page above or ask a qualified tax professional about your own case.

Published November 6, 2026. General information, not tax advice. Nolly Services Inc is a private company and is not part of the IRS.