A Foreign Investor Owned U.S. Rental Properties Through LLCs. What Needed to Be Filed?

The investor had never filed a U.S. return. Most of that withholding, it turned out, was more than he owed.

The client's situation

The client lives in South America and owns three condominiums in Florida, each held in a separate single-member LLC. A local property manager collects the rent, pays the association dues and repairs, and remits the net to the owner. At the start, the manager asked for a Form W-8BEN and, as required for passive U.S. rental income paid to a foreign person, withheld 30% of the gross rents.

What went wrong

No one had explained the alternative. The client assumed the withholding was the end of the matter, and no personal returns or LLC filings had been made.

The tax or reporting requirement

Several separate filings were involved:

• Owner's return: rental income from U.S. property is U.S.-source. A nonresident can elect to treat it as effectively connected income and be taxed on the net amount — after depreciation, dues, repairs, interest and other expenses — by filing Form 1040-NR. Without that election, tax is 30% of the gross rent.
• Each LLC: as a foreign-owned single-member LLC, each must file a pro forma Form 1120 with Form 5472 reporting contributions (such as the purchase funds) and distributions (such as the net rent paid to the owner).
• Identification: the owner needed an ITIN to file Form 1040-NR.

Timing also matters: a nonresident's deductions can be denied if the return is filed too late — generally more than 16 months after its due date — so delay can permanently cost the benefit of the net-basis election.

The potential IRS exposure

The client was overpaying, but he also had exposure: three LLCs with three years of missing Forms 5472, each with a potential $25,000 penalty, and the risk of losing deductions for older years if returns were not filed promptly. A future sale would also be subject to FIRPTA withholding, which is easier to manage when the prior returns are in order.

How Chirino USA analyzed the situation

We reconstructed income and expenses for each property and computed depreciation from the purchase records. On a net basis, the properties produced a modest taxable profit — far lower than the 30% gross withholding. We checked which years were still within the window for claiming deductions and prioritized those, and we mapped each LLC's contributions and distributions for Form 5472.

How we addressed the issue

We prepared the owner's Forms 1040-NR with the net-basis election and the ITIN application, claiming the tax withheld as a credit. We filed the late pro forma Forms 1120 and Forms 5472 for all three LLCs with reasonable cause statements. Going forward, the owner provided the manager with Form W-8ECI, which generally allows rent to be paid without the 30% gross withholding, and we set up estimated payments for the net tax instead.

The result

The returns produced refunds of most of the excess withholding for the years still eligible for deductions, all three LLCs are current, and the owner now pays tax on his actual profit each year. When he eventually sells a property, the clean filing history will make the FIRPTA process simpler.

What other taxpayers in similar situations should know

• 30% gross withholding is the default for foreign owners of U.S. rentals, not the final answer.
• The net-basis election can significantly reduce tax, but late returns can lose deductions.
• Each single-member LLC holding a property has its own Form 5472 obligation.
• Form W-8ECI, not W-8BEN, is generally used once the election is in place.

How Chirino USA can help

Chirino USA Accountants & Advisors specializes in U.S. international tax matters for foreign individuals, foreign-owned U.S. businesses, and Americans in the U.S. and abroad. If your situation sounds similar, we can review what was filed, identify any exposure, and help you decide on the appropriate next step. You can email us or message us on WhatsApp, in English or Spanish.

Sources and official references

• IRS Publication 519, U.S. Tax Guide for Aliens
• IRS — About Form W-8ECI
• IRS — FIRPTA Withholding
• IRS — About Form 5472