Section 871(d) Election: 30% of Gross Rent vs Net Basis

A nonresident alien buys a US rental house, collects $5,000 a month, pays a mortgage, property taxes, insurance, and a management company, and finishes the year roughly at breakeven. Then the property manager remits $18,000 to the IRS. Nothing went wrong: that is the default rule working exactly as written. US rents paid to a nonresident are taxed on gross receipts at a flat 30%, and the deductions that produced the breakeven result are simply not part of the calculation. The fix is a one-page election under IRC Section 871(d), and the difference between making it and not making it is frequently the entire economic return on the property.

Why Is 30% Being Withheld From My US Rental Income?

Because rent is on the statutory list. IRC §871(a)(1)(A) taxes a nonresident alien at 30% on "interest, dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, and other fixed or determinable annual or periodical gains, profits, and income" received from US sources, to the extent the amount is not effectively connected with a US trade or business. Rent from real property located in the United States is US-source income under §861(a)(4), so the 30% rate attaches unless something moves the income into the effectively connected category.

Three features of that rule cause the damage:

• The base is gross, not net. Section 871(a) taxes the amount received, full stop. There is no mechanism inside §871(a) for subtracting anything, because deductions are allowed to a nonresident under §873(a) only against income that is effectively connected with a US trade or business.
• Gross means gross even for money you never touch. If a management company collects $5,000 and remits $4,500 after its fee, the FDAP amount is $5,000. The fee is an expense, and expenses are not in the calculation.
• Collection happens at the source. IRC §1441(a) requires every withholding agent to deduct and withhold 30% from the payment. Treas. Reg. §1.1441-7(a)(1) defines a withholding agent as any person, US or foreign, having control, receipt, custody, disposal, or payment of an item of income subject to withholding. A property management company is squarely inside that definition. So, technically, is an individual tenant writing a rent check directly to a foreign landlord. IRC §1461 makes the withholding agent personally liable for tax it fails to withhold, which is why professional managers withhold aggressively and ask questions later.

The agent reports the withholding on Form 1042-S and files Form 1042 by March 15 following the calendar year. And under Treas. Reg. §1.6012-1(b)(2)(i), a nonresident alien who at no time during the year is engaged in a US trade or business, and whose US tax liability is fully satisfied by withholding at source, generally has no Form 1040-NR filing obligation at all. That is the trap. The system is self-completing, nobody sends a notice, and the owner has no reason to suspect that a return would have produced a very different number.

Does Owning a US Rental Property Make Me Engaged in a US Trade or Business?

Not automatically, and that uncertainty is the reason the election exists. Whether rental activity rises to a US trade or business is a facts-and-circumstances question that turns on the regularity, continuity, and substantiality of the owner's activity. A single property under a triple net lease, where the tenant handles taxes, insurance, and maintenance and the owner does nothing but deposit checks, is the classic example of activity that does not constitute a trade or business. A portfolio of multifamily buildings with active leasing, repairs, and vendor management, by contrast, generally does.

If the activity is a trade or business, the rental income is effectively connected income by operation of law and the net-basis rules apply without any election. If it is not, the income is FDAP and the 30% gross tax applies. Nonresident owners rarely know which side of the line they are on, and the line is expensive to be wrong about.

Section 871(d) removes the question. It does not ask whether you conduct a trade or business. It lets you elect the answer. That is a rare thing in the Code, and it is why the election is close to automatic advice for any leveraged or depreciating US rental property held by a nonresident.

What Does the Section 871(d) Election Actually Do?

It converts a category of income. Under IRC §871(d)(1), a nonresident alien individual who derives income from real property held for the production of income and located in the United States, or from any interest in such real property, may elect to treat all of that income as effectively connected with the conduct of a US trade or business for the year. The statute expressly sweeps in gains from the sale or exchange of such property, rents and royalties from mines, wells, and other natural deposits, and gains described in §631(b) or (c) on timber, coal, and domestic iron ore.

Once the income is effectively connected, four things change at once:

Four limits are worth stating precisely, because each one catches somebody:

1. The election is all or nothing across your portfolio. Treas. Reg. §1.871-10(b)(1) applies the election to all income from real property located in the United States and held for the production of income, and says flatly that the election "may not be made with respect to only one class of such income." You cannot elect for the loss property and leave the profitable one on the 30% gross basis.
2. A year with no qualifying income is not an electable year. Treas. Reg. §1.871-10(a) provides that if for the tax year the taxpayer has no income from real property located in the United States which is subject to the tax imposed by §871(a) or §881(a), the election may not be made. This is the limit that constrains late elections most often: a taxpayer whose earliest still-open year was a vacant year, or a year before the property was placed in service, cannot elect for that year and has to start with a later year that actually produced §871(a) income.
3. Property not held for the production of income is outside the election. A personal vacation home that is never rented produces no income to elect on. Note that this is a limit on what the election reaches, not on what has to be disclosed, and the two are commonly confused. The property schedule described below covers everything you own.
4. The election does not import other consequences of being in business. It changes the character of the real property income. It is not a general concession that the taxpayer is engaged in a US trade or business for every other purpose in the Code.

One favorable point that is easy to miss: the 3.8% net investment income tax under §1411 does not apply. §1411(e)(1) expressly exempts nonresident aliens. A US-resident owner of the identical property with the identical net rental income can owe NIIT on it; the nonresident with a §871(d) election cannot. Self-employment tax is likewise not in play, since rents from real estate are generally excluded from net earnings from self-employment under §1402(a)(1).

How Much Tax Does the 871(d) Election Actually Save?

On a typical leveraged single-family rental, the difference is routinely the property's entire cash flow after operating costs and mortgage interest. Here is a complete worked comparison with every input stated.

The property. A nonresident alien individual, unmarried, owns one US residential rental house directly. It is her only US income. The building (excluding land) has a depreciable basis of $440,000.

Year's operating results:

The $16,000 assumes a full steady-state year of ownership. In the acquisition year it would be smaller, because §168(d)(2) applies the mid-month convention to residential rental property, treating it as placed in service at the midpoint of the month it was actually placed in service. That matters in practice, since the acquisition year is exactly when an owner first runs this comparison.

Step 1, the default gross-basis result. Section 871(a)(1)(A) taxes the gross rents at 30%. No deduction is allowed for any of the seven expense lines above.

Tax = 30% x $60,000 = $18,000

That $18,000 is collected by the management company as a withholding agent under §1441(a), typically at $1,500 out of each $5,000 monthly remittance, and reported on Form 1042-S.

Step 2, the net-basis result with a §871(d) election. Total deductions are $18,000 + $9,600 + $2,400 + $3,600 + $6,000 + $2,400 + $16,000 = $58,000.

Effectively connected taxable income = $60,000 - $58,000 = $2,000

A nonresident alien is denied the standard deduction outright by §63(c)(6)(B), which sets it at zero, so the $2,000 is taxable in full. It falls entirely within the 10% bracket: for tax year 2026 the 10% bracket for a single filer runs to $12,400 of taxable income under Rev. Proc. 2025-32.

Tax = 10% x $2,000 = $200

Step 3, the comparison against real cash. Cash outlays were $58,000 minus the $16,000 non-cash depreciation deduction, or $42,000. Cash flow after operating costs and mortgage interest was therefore $60,000 - $42,000 = $18,000. That figure counts interest only. It is stated before any principal amortization, which is a real use of cash but not a deduction, so the owner's actual free cash is lower still.

The default regime takes $18,000 out of $18,000 of cash flow after operating costs and interest. The elected regime takes $200. That is not a rounding difference in tax planning; it is the entire yield on the investment.

The result gets starker, not milder, when the property runs at a book loss. Change one input, raise the mortgage interest to $23,000, and net income becomes a $3,000 loss. The net-basis income tax on that loss is zero. The gross-basis tax on the same property is still $18,000, because §871(a) never looked at expenses in the first place.

Be honest about what the loss itself is worth, though, because this is routinely oversold. The loss is generally a passive activity loss under §469, and for a nonresident whose only US income is this one property it delivers no current benefit at all: there is no other US income for it to offset, so it suspends and carries forward, becoming useful only against future rental income or on the eventual disposition. Its character is not perfectly settled either. Treas. Reg. §1.871-10(c)(2) deems property covered by the election to be property not used in a trade or business for purposes including §172(d)(4)(A), §1221(2), and §1231(b), which cuts against treating the elected activity as an ordinary business for every downstream purpose. The election still wins by $18,000 in this scenario. It just wins because of the tax it avoids, not because of the loss it creates.

How Do You Actually Make the Section 871(d) Election?

You attach a statement to a return. There is no form number and no box to check. Treas. Reg. §1.871-10(d)(1)(i) provides that the initial election is made by filing the statement with the return for the first tax year to which it applies, and it may be made at any time before the period prescribed by §6511(a) for filing a claim for credit or refund for that year expires, or before the period prescribed by §6511(c) where the period for assessment has been extended by agreement. That is more generous than most elections: it can be made on an amended return, not only on an original one, and no timely filing is required. What it is not is unlimited, for the reason explained in the next section but one.

Three procedural details drive most of the failures we see:

• Two clocks run, and the shorter one governs. The election has the §6511(a) window. The deductions have a much harder deadline under §874(a), described in the next section but one. An election filed inside the §6511 window on a return filed outside the §874(a) window buys effectively connected treatment with nothing left to subtract from it.
• Know your due date. For a nonresident alien with no wages subject to US withholding, the Form 1040-NR due date is the 15th day of the sixth month after year end, June 15 for a calendar-year filer, under §6072(c). Form 4868 extends that to December 15. The due date matters because it starts the 16-month clock.
• The schedule of properties is not boilerplate. Item 2 requires a complete list of everything you own in the United States, income-producing or not. An election statement that names one rental while the taxpayer also owns a condo he uses himself is not a complete statement, and the omission is discovered at exactly the wrong time.

One structural point that catches foreign investors constantly, because US rentals are so often held through an LLC or a partnership rather than directly: when the real property income flows through a partnership, Treas. Reg. §1.871-10(d)(3) provides that the election "shall be made by the partners and not by the partnership." Each foreign partner makes his own election, furnishes the partnership a Form W-8ECI with a copy of the election attached (or, if foreign status is already established with the partnership, just the copy of the election), and the partnership then treats that partner's share as effectively connected income. The withholding consequence is not that withholding stops. It shifts: the partnership withholds on effectively connected income allocable to a foreign partner under §1446 instead of withholding 30% FDAP under §1441. A partner who assumes the entity handled the election, or who expects the W-8ECI to end withholding entirely, is wrong on both counts.

Can You Revoke the Section 871(d) Election Later?

Only on narrow terms, and you should plan on keeping it. Treas. Reg. §1.871-10(d)(2)(i) provides that the election remains in effect for all subsequent tax years, including tax years in which the taxpayer realizes no income at all from the real property, unless it is properly revoked. The regulation splits revocation into two very different tracks, and they are frequently collapsed into one another:

• Revocation for the first year, without consent. Under Treas. Reg. §1.871-10(d)(1)(i), the taxpayer may revoke the election for the first tax year for which it was made without the consent of the Commissioner, but only within the period prescribed by §6511 for filing a claim for credit or refund for that year. This is the mirror image of the election window itself. Critically, the same provision states that where the revocation is timely and properly made this way, the taxpayer may make his initial election for a later taxable year without the consent of the Commissioner. There is no waiting period on this track at all. This first-year track is a regulatory gloss on a stricter-sounding statute: IRC §871(d)(1) on its face permits revocation only "with the consent of the Secretary with respect to any taxable year," and §871(d)(2) bars a new election before the fifth year after any revocation unless the Secretary consents, while Treas. Reg. §1.871-10(d)(1)(i) reads that consent requirement as reaching only revocations after the first year.
• Revocation for any later year, with consent. Consent of the Commissioner is required. Under Treas. Reg. §1.871-10(d)(2)(iii), the request must be in writing, signed by the taxpayer or an authorized representative, filed within 75 days after the close of the first taxable year for which the change is desired, addressed to the Director of International Operations, and it must specify the year and the grounds. A copy of the Commissioner's consent is then attached to the return for that year. The 75-day clock is short and it is measured from year end, not from the return due date.
• The waiting period attaches only to that second track. Where the revocation was made with the Commissioner's consent, Treas. Reg. §1.871-10(d)(2)(i) bars a new election without consent before the fifth taxable year which begins after the first taxable year for which the revocation is effective. Note the anchor: it runs from the first year the revocation takes effect, not from the date of the revocation filing. Treas. Reg. §1.871-10(d)(2)(ii), captioned "Effect of new election," then treats an election made for that fifth year or later as a fresh initial election.

The distinction matters because the two tracks are asymmetric in a way that favors moving early. A taxpayer who elects, sees the first year's numbers, and decides against it is not locked out of anything, provided the revocation goes in inside the §6511 window for that first year. A taxpayer who lets the election ride for several years and then wants out faces a consent request on a 75-day fuse and, if granted, a multi-year wait before electing again without consent.

That said, the practical read is unchanged: the §871(d) election is a long-term commitment made once, at the front of an ownership period, and it should be evaluated against the whole holding period rather than the first year's numbers. In the overwhelming majority of leveraged, depreciating rental situations the analysis is not close.

What Happens If You Never Filed and Want to Make the Election Late?

This is the real emergency, and the binding deadline is not the election's. IRC §874(a) allows a nonresident alien the benefit of deductions and credits only if the taxpayer files a true and accurate return, and Treas. Reg. §1.874-1(b)(1) puts a clock on it. The rule has two branches, and the second one is the one that catches long-term non-filers:

• If the taxpayer filed a return for the immediately preceding tax year, or the current year is the first year a return was required, the return must be filed within 16 months after the §6072 due date.
• If no return was filed for the preceding year, the deadline is the earlier of that 16-month date or the date the IRS mails a notice that the return has not been filed and that deductions and credits may not be claimed.

That second branch is why a nonresident who has never filed cannot simply assume a rolling 16-month grace period. A single IRS notice closes the window immediately for the year it addresses. Treas. Reg. §1.882-4(a)(3)(i) imposes the parallel rule for foreign corporations at 18 months.

Miss the window and the consequence is severe and specific: the return can still be filed, but no deductions are allowed, so the tax is computed on gross income. The credit side is narrower than it is usually described. Treas. Reg. §1.874-1(a) states that no provision of the section (other than paragraph (c)(2)) shall be construed to deny the credits provided by §§31, 32, 33, 34, and 852(b)(3)(D)(ii). Section 33 is the credit for tax withheld at source on nonresident aliens, which is exactly the 30% §1441 withholding this article is about. So the deductions are gone, but the tax already withheld remains creditable against whatever the return computes.

Work the example through that outcome, because the arithmetic does not go the way most summaries claim. A §871(d) election made after the §874(a) window produces $60,000 of effectively connected income with nothing to subtract, taxed at graduated §1 rates. For a single filer at 2026 brackets that is $5,800 plus 22% of the excess over $50,400:

Tax = $5,800 + 22% x ($60,000 - $50,400) = $7,912

That is less than half the $18,000 flat gross-basis tax, not more. And because §33 survives, the $18,000 already withheld is credited against the $7,912, leaving the taxpayer owed a $10,088 refund. Graduated rates applied to gross income do not average out to 30% until gross income reaches roughly $625,000 for a single filer at 2026 brackets, so for an ordinary rental the graduated-on-gross result beats the flat 30% comfortably.

The reason to hit the §874(a) deadline is therefore not that graduated-on-gross is worse than the flat rate. It is that blowing the deadline destroys the deductions, which is where essentially all of the value lives: $7,912 of tax on gross income versus $200 on net. That is the real cost of a late return in this example, every year it happens, and it is far larger on a bigger or more leveraged property.

Both regulations contain a relief valve. Treas. Reg. §1.874-1(b)(2) and §1.882-4(a)(3)(ii) allow the Commissioner to waive the filing deadline where the taxpayer establishes, on the facts and circumstances, that he acted reasonably and in good faith in failing to file. The taxpayer must not have knowingly avoided filing and must cooperate in determining the liability. The weighed factors include whether the taxpayer voluntarily came forward before IRS contact, awareness of the protective return option, prior filing history, and diligence in learning about the obligation. It is a showing, not a checkbox, and voluntary disclosure before an IRS notice is worth far more than the same disclosure after one.

There is also a quieter cost to years spent on the gross basis. Basis in depreciable property is reduced under §1016(a)(2) for depreciation allowed, and not less than the amount allowable. Where a nonresident owner spends a decade on the 30% gross regime and takes no depreciation, the interaction between that rule and the §873(a) disallowance is unsettled and is contested on audit, when it is far too late to fix. Electing net-basis treatment and actually claiming depreciation each year removes the argument entirely. If any part of the depreciation history is uncertain, a Form 3115 accounting method change is usually the tool for correcting it rather than a chain of amended returns.

How Does Form W-8ECI Stop the 30% Withholding at the Source?

By giving the payor documentary authority not to withhold. Treas. Reg. §1.1441-4(a)(1) provides that withholding is not required under §1441 on amounts the beneficial owner certifies are effectively connected with the conduct of a US trade or business and includible in the beneficial owner's gross income for the year. The certification is made on Form W-8ECI, "Certificate of Foreign Person's Claim That Income Is Effectively Connected With the Conduct of a Trade or Business in the United States," furnished to the property manager or, in a direct-lease arrangement, to the tenant.

Four points determine whether this actually works in practice:

• A W-8ECI without a US TIN is invalid. The form requires an ITIN or EIN, and so does the Form 1040-NR the election lives on, under IRC §6109. A foreign individual ineligible for a Social Security number applies on Form W-7, normally attached to the return it supports. Start it early: ITIN processing is slow, and a late return is the one thing the §874(a) rule punishes. An ITIN not used on a federal return for three consecutive years expires, which owners discover at the worst moment, when a FIRPTA withholding certificate or a final return suddenly needs it. Details in our guide to getting an ITIN with Form W-7.
• It is furnished to the payor, not filed with the IRS. The manager retains it and relies on it. It generally remains valid until circumstances change, subject to the withholding agent's own re-solicitation practices.
• It documents the position, it does not create it. Furnishing a W-8ECI while never filing a Form 1040-NR is a poor position: the certification represents that the income is includible in gross income on a US return.
• Timing is not retroactive. A W-8ECI delivered in July does not undo January through June withholding. That over-withholding is recovered as a credit against the tax computed on the Form 1040-NR, matched to the Form 1042-S the agent issues, which is another reason a return has to be filed even in a refund year.

How Does the Election Work for a Foreign Corporation Under Section 882(d)?

Identically in structure, with one significant additional tax to model. IRC §882(d) gives a foreign corporation the same election on the same terms: income from US real property held for the production of income is treated as effectively connected, and Treas. Reg. §1.871-10 governs the manner of making and revoking the election for both §871(d) and §882(d). The gross-basis default for a foreign corporation sits in §881(a) at the same flat 30%, with withholding under §1442.

The differences that matter:

• Rate. Effectively connected taxable income of a foreign corporation is taxed under §882(a)(1) at the regular corporate rate of 21% under §11(b), not at individual graduated rates.
• Filing. The return is Form 1120-F, and the deduction cutoff is the 18-month rule of Treas. Reg. §1.882-4(a)(3)(i) rather than 16 months.
• The branch profits tax. This is the one that surprises people. IRC §884(a) imposes a 30% tax on the dividend equivalent amount of a foreign corporation's effectively connected earnings and profits, on top of the 21% corporate tax, unless an applicable treaty reduces or eliminates it. Electing net basis under §882(d) creates effectively connected earnings and profits, which is exactly what §884 taxes. A structure that looks efficient at 21% can carry a materially higher all-in rate once §884(a) is layered on.

The corporate wrapper is often chosen for estate tax reasons rather than income tax reasons, since a US real property interest held directly by a nonresident individual is US-situs property for estate tax purposes and §2102(b)(1) allows the estate of a nonresident who is not a citizen a unified credit of only $13,000, an exemption equivalent of roughly $60,000, absent an applicable estate tax treaty. That is a legitimate concern, but it is an estate planning decision with a real annual income tax cost attached, and the two analyses have to be run together. Our cross-border tax practice models the combined income, branch profits, and transfer tax outcome before an entity is formed, because unwinding a foreign corporation that already holds appreciated US real estate is expensive.

What Happens When You Sell the Property?

The sale is a separate regime, and the §871(d) election does not control it. Gain on the disposition of a US real property interest by a nonresident is treated as effectively connected income by IRC §897(a) as a matter of law, whether or not any election was ever made. Collection runs through FIRPTA: IRC §1445(a) generally requires the transferee to withhold 15% of the amount realized, reported on Forms 8288 and 8288-A, with statutory exceptions and a withholding certificate procedure for reducing the amount.

Two consequences follow for an owner who has been on the gross basis:

• Withholding is on the amount realized, not on gain. A seller with little or no gain, or a loss, can face substantial withholding on the sale price and must file to recover it.
• Depreciation comes back. Unrecaptured §1250 gain attributable to depreciation on real property is taxed at a maximum 25% rate under §1(h)(1)(E), which is a reason to have claimed depreciation deliberately and documented it rather than to have it reconstructed by an examiner.

The mechanics of the 15% rate, the exceptions, the withholding certificate application, and the reporting deadlines are covered in full in our FIRPTA withholding and Form 8288 guide. Plan the disposition and the annual rental reporting as one project, because the depreciation schedule created by the §871(d) election is the same schedule that drives the gain calculation on exit.

Bottom Line

A nonresident alien who owns a US rental property and does nothing is taxed at 30% of gross rent under §871(a)(1)(A), collected at the source under §1441(a), with §873(a) blocking every deduction that produced the property's actual economic result. On the worked example, that is $18,000 of tax on $18,000 of cash flow after operating costs and interest. A §871(d) election, made by a statement meeting the six content requirements of Treas. Reg. §1.871-10(d)(1)(ii) and attached to a Form 1040-NR, moves the same property to a net basis at graduated rates with full deductions including depreciation, and produces $200. The election can be made any time within the §6511(a) window, on an amended return, but it cannot be made for a year with no §871(a) income at all. File more than 16 months past the §6072 due date, or after an IRS non-filing notice, and §874(a) strips the deductions, taking the same property from $200 to $7,912. The withholding credit under §33 survives that failure; the deductions do not, and the deductions are the whole game. A Form W-8ECI stops the withholding prospectively, an ITIN is a prerequisite, and where the property is held through a partnership the partners elect and §1446 replaces §1441. Foreign corporations get the same election under §882(d) at 21%, with the §884(a) branch profits tax as the offsetting consideration. None of it changes the sale, which is §897 and §1445 territory on its own track.

If you own US rental real estate as a nonresident, are seeing 30% withheld at source, or have never filed a Form 1040-NR for a property you have held for years, our international tax team quantifies the exposure, determines which years remain open under the §874(a) deadline, and prepares the election, the return, and the W-8ECI. Have questions about the Section 871(d) election and US rental property? Contact TS CPA for a free consultation. We respond within the same day.

Official IRS and Government Sources

• IRC Section 871, Tax on Nonresident Alien Individuals
• IRC Section 873, Deductions Allowed to Nonresident Aliens
• IRC Section 874, Allowance of Deductions and Credits
• IRC Section 882, Tax on Income of Foreign Corporations Connected With US Business
• IRC Section 1441, Withholding of Tax on Nonresident Aliens
• IRC Section 1445, Withholding of Tax on Dispositions of United States Real Property Interests
• IRC Section 884, Branch Profits Tax
• IRC Section 1411, Net Investment Income Tax (subsection (e)(1) excludes nonresident aliens)
• IRC Section 33, Tax Withheld at Source on Nonresident Aliens and Foreign Corporations
• IRC Section 1446, Withholding on Effectively Connected Income Allocable to Foreign Partners
• IRC Section 63, Taxable Income Defined (subsection (c)(6)(B), standard deduction is zero for a nonresident alien)
• Rev. Proc. 2025-32, Inflation Adjustments for Tax Year 2026
• Treas. Reg. Section 1.871-10, Election to Treat Real Property Income as Income Connected With United States Business
• Treas. Reg. Section 1.874-1, Allowance of Deductions and Credits to Nonresident Alien Individuals
• IRS Publication 519, US Tax Guide for Aliens
• IRS About Form 1040-NR
• IRS About Form W-8ECI
• IRS Publication 527, Residential Rental Property