It’s a scenario we see more often than we should: a nonresident alien (NRA) filing Form 1040NR attempts to claim rental expenses or depreciation losses from a condo in London, an apartment in Mumbai, or a vacation home in Toronto.
If you are thinking about doing this—or if you’ve already hit “submit”—it is time for a reality check. Claiming losses from residential real estate located outside of the United States on a 1040NR is a direct violation of IRS rules.
Here is the comprehensive breakdown of why this is prohibited and the very narrow circumstances under which rental deductions are actually allowed.
Can You Claim Foreign Rental Losses?
The short answer: NO.
A taxpayer filing Form 1040NR generally cannot claim a loss from residential real estate located outside of the United States. Period. Doing so misrepresents your taxable income and ignores the fundamental “source of income” rules that govern international taxation.
Why the IRS Disallows Foreign Rental Deductions
The legal reasoning is straightforward but firm. The IRS maintains a “wall” between U.S. and foreign activities for nonresident aliens.
1. The “Effectively Connected” Rule
Nonresident aliens are only taxed on two types of income:
- Effectively Connected Income (ECI): Income from a U.S. trade or business.
- Fixed, Determinable, Annual, Periodical (FDAP) Income: U.S. source income (like dividends) taxed at a flat rate.
Deductions are only allowed if they are connected to ECI. Because real estate located outside the U.S. produces foreign source income, it is not ECI. Therefore, any associated expenses are legally non-deductible on a U.S. return.
2. Improper Allocation of Expenses
IRS rules require that deductions be “properly allocated and apportioned” to ECI. Since foreign real estate is not connected to a U.S. business, there is no legal basis to apportion those costs to your U.S. tax filing. As Publication 519 (U.S. Tax Guide for Aliens) confirms, you cannot deduct expenses related to income that the U.S. doesn’t have the right to tax in the first place.
3. The IRS Example
The IRS is quite clear: If a nonresident alien owns a rental property in France, the income is not ECI. Consequently, any loss sustained on that French property cannot be used to offset U.S. income.
When CAN You Claim Rental Deductions?
While foreign property is off-limits, you can claim deductions for U.S.-based property under specific conditions. To do so, the income must be treated as ECI.
The § 871(d) “Net Election”
Normally, U.S. rental income for an NRA is taxed at a flat 30% on the gross amount (no deductions allowed). However, the IRS allows a special election under Internal Revenue Code § 871(d).
- The Benefit: By making this election, you treat the rental activity as a U.S. trade or business.
- The Result: You can now deduct “ordinary and necessary” expenses—mortgage interest, property taxes, insurance, repairs, and depreciation. You are then taxed at graduated rates on the net income rather than the gross.
Requirements for Deductions:
- U.S. Location: The property must be physically located in the United States.
- Timely Filing: To claim these deductions, you must file a “true and accurate” return. If you file more than 16 months late, the IRS can disallow all deductions and tax you on the gross income.
- Proper Reporting: Income and expenses must be reported on Schedule E, attached to your Form 1040NR.
Summary of Rules for 1040NR Filers
| Requirement | Allowed? | Notes |
| U.S. Real Estate (ECI) | YES | Only if ECI by activity or § 871(d) election. |
| U.S. Real Estate (Non-ECI) | NO | Taxed at 30% gross; no deductions allowed. |
| Foreign Real Estate | NO | Violation of IRS rules. Never deductible. |
| Timely Filed Return | REQUIRED | Late returns (16+ months) may lose all deduction rights. |
Final Warning
Attempting to offset your U.S. tax liability with losses from foreign rental properties is an incorrect application of the tax code. It can lead to audits, interest, and substantial penalties.
Our Advice: Stick to reporting U.S. source income and ensure that any U.S. rental deductions are backed by a valid § 871(d) election and a timely filed return.
