A choice is available regarding income from real property in the US. This income is generally considered income that is not effectively connected with a US trade or business, and is taxed at a flat rate of 30 percent on gross income. A nonresident individual is not required to file a US return if tax of 30 percent is withheld by the payor. Alternatively, a return can be filed, including an election (under IRC Sec. 871(d)) to have the net income (after expenses) taxed as income effectively connected with a trade or business in the US. This is generally a much better way to go for nonresident aliens. Any net income is taxed at graduated rates beginning at 10 percent. Under Section 897 of the Internal Revenue Code, gain on the disposition of real property by a nonresident alien is always treated as income effectively connected with a US trade or business, and is therefore taxable, but at the generous capital gains rates.

If you make this election, the income and deductions relating to rental of real property are reported on Schedule E, which is included with the federal individual nonresident tax return.