Dual Status Issue

[Kram BergGold]

Taxppayer will be filing a Dual Status Return for 2013. Moved to US on July 25. On that date she begain renting her home in a foreign country. On July 1 she paid $1,000 to advertise the rental. As this expense was paid prior to both the rental and the change in status from NR Alien to Resident Alien do you think it is ok to deduct the $1,000 on the Schedule E attached to the 1040? There is no US income to report on the 1040NR for the non resident period.

[DaveinTexas]

Did some digging

but I am no expert in this area; this may get you started in the right direction though. From IRS site:

"Effectively and Not Effectively Connected Income
All worldwide income for your period of residence and all income that is effectively connected with a trade or business in the United States for your period of nonresidence, after allowable deductions, is combined and taxed at the rates that apply to U.S. citizens and residents. Income that is not connected with a trade or business in the United States for your period of nonresidence is subject to the flat 30% rate or lower treaty rate. ***You cannot take any deductions against this not effectively connected income***. Refer to Taxation of Nonresident Aliens or Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities, for more information."

You may already know about this but I'll just add a side note for those that may not, be wary of the rules requiring the reporting the Rental Property or Real Estate in general on Form 8938. Foreign real estate is not reported on this form 8938 unless the real estate is held through a foreign entity, such as a corporation, partnership, trust or estate, then the interest in the entity is a specified foreign financial asset that is reported on Form 8938. I will also point out that real estate held in a trust is common, such as certain pieces of real estate owned by a US citizen in Mexico, along the coastline and/or borders. They require you to put the real estate in a Mexican Trust (fideicomiso) and this as I understand it, would become a reported asset on Form 8938.

You may want to check the ownership (title) status of your client's property. Just a thought.

[ATSMAN]

Be cautious with situations where a new "resident" of USA wants to claim rental deductions. Check the tax treaties. I had a situation where the taxpayer (a US citizen) married a fellow in India, and then he moved to USA with a "Green Card" and the year he came to USA (I think it was close to Christmas that year), they wanted to deduct rental expenses for renting out his house in India, moving costs etc!

I had to refer to the tax treaty and other cites and told them they could not deduct the rental and moving cost without triggering an audit and their documentation for the rental was sparse and most of the stuff they were showing me was written in the native language!

They walked away went, to HRB and probably got the same answer and a bigger bill, because a month after that they came in and agreed with me.