Strategy Snapshot
Form 1040-NR taxes nonresident aliens on U.S.-source income only, under two parallel regimes: effectively connected income at graduated rates with deductions, and passive FDAP income at a flat 30% (or treaty rate) with none. Which regime applies, and the elections that move income between them, drive the entire outcome, especially for foreign owners of U.S. rental property.
Nonresident aliens engaged in a U.S. trade or business, those with U.S. income not fully taxed by withholding, and anyone claiming a refund of over-withheld tax.
Effectively connected income: graduated rates, deductions allowed. FDAP (dividends, interest, royalties, gross rents): flat 30% or the treaty rate, no deductions.
Foreign rental owners who never make the net election and owe 30% of gross rent, and green card holders who file 1040-NR without realizing they are still U.S. tax residents.
Form 1040-NR is the return nobody plans to file. A Colombian investor buys a Miami condo and rents it out, a Mexican entrepreneur’s U.S. LLC starts generating profit, a Brazilian executive spends a season working in Florida, and each of them now owes the IRS a return, on a form that works very differently from the regular 1040. The differences are not cosmetic: the entire logic of how nonresidents are taxed runs through two separate regimes, and the elections that move income between them are where the money is.
The starting principleThe U.S. taxes nonresident aliens on U.S.-source income only, but how it taxes each dollar depends entirely on which of two buckets the income falls into.
First Question: Are You Actually a Nonresident?
Form 1040-NR is only for nonresident aliens, and status is determined by rules, not intuition:
- Green card holders are residents, taxed on worldwide income on a regular 1040, no matter where they live, until the card is formally abandoned or a treaty tie-breaker is claimed. An expired but never-surrendered green card still means resident.
- Everyone else runs the substantial presence test: 31 days in the current year, plus a weighted 183-day count across three years (all of this year’s days, one-third of last year’s, one-sixth of the year before). Pass it and you are a resident, unless the closer connection exception or an exempt-individual category applies.
- Arrival and departure years are often dual-status years, part resident and part nonresident, filed on a combination of the two forms with their own set of restrictions.
Getting this threshold question wrong invalidates everything that follows, in either direction.
The Two Regimes: ECI vs. FDAP
Every dollar of a nonresident’s U.S. income lands in one of two buckets, and they are taxed nothing alike.
Effectively connected income (ECI). Income from a U.S. trade or business: operating profits, self-employment earnings for work performed in the U.S., and gains on U.S. real estate. ECI is taxed at the same graduated rates as residents pay, with deductions for the expenses of producing it, reported on page one of the 1040-NR.
FDAP income. Fixed, determinable, annual, or periodical income: dividends, interest, royalties, and rents (absent an election). FDAP is taxed at a flat 30% of the gross amount, no deductions, or the lower rate a treaty provides, and is usually collected by withholding at the source against a W-8BEN . If withholding fully covered the tax, that income often requires no return at all; Schedule NEC of the 1040-NR reports it when a return is filed.
| ECI | FDAP | |
|---|---|---|
| Tax rate | Graduated, like residents | Flat 30% or treaty rate |
| Deductions | Allowed | None; tax on gross |
| Collected by | The return | Withholding at source |
| Typical items | Business profits, U.S. services, real estate gains | Dividends, interest, royalties, gross rents |
The Election That Defines Foreign-Owned Rentals
Rental income sits by default in the FDAP bucket: 30% of gross rent, no deduction for the mortgage, the property manager, the repairs, or depreciation. For almost every rental that math is brutal, which is why Section 871(d) allows a net election to treat U.S. real estate income as ECI: graduated rates on net income after all expenses, which for a typical leveraged rental produces little or no tax in the early years. The election is made on a statement with the 1040-NR, and filing the return is what preserves the deductions. Our guide to foreign-owned U.S. rental property covers the full lifecycle, and when the property eventually sells, FIRPTA withholding enters the picture, with the 1040-NR again being how the actual tax is reconciled against the 15% withheld.
What Form 1040-NR Does Not Give You
The form is a 1040 with the generosity removed, and the differences surprise filers used to resident returns:
- No standard deduction (except students and business apprentices from India, by treaty)
- Itemized deductions from a short list only: state and local income taxes, charitable contributions to U.S. organizations, casualty losses
- No joint filing in the ordinary case: married nonresidents each file separately, and most credits that turn on filing status shrink or disappear
- Personal-use losses, education credits, earned income credit: generally unavailable
Treaties can restore pieces of this picture (a dependent article here, a pension exemption there), and a treaty position that overrides the default rules generally needs Form 8833 attached.
Deadlines and Mechanics
Two due dates, depending on the facts: April 15 for nonresidents who had wages subject to U.S. withholding, June 15 for everyone else, each extendable to October 15. Filers need a taxpayer identification number, which for most nonresidents means an ITIN application on Form W-7 , often submitted with the first return. And a nonresident who was engaged in a U.S. trade or business must file even at a loss: the return is what starts the statute of limitations and preserves the deductions and elections, and the IRS can deny deductions entirely on returns filed years late.
When to Seek Help
A single brokerage account with correct treaty withholding may need no return at all. Get help when there is U.S. rental property (the net election and depreciation schedule are the whole game), a property sale with FIRPTA withholding to recover, a dual-status year around a move, a green card in the background, or treaty positions that need Form 8833 . Nonresident returns are the daily work of our foreign business and investors practice , and the recurring theme is that the elections and the filing itself, not the tax rate, decide what the U.S. investment actually costs.
Last updated: 2026