Keeping a US property and renting it out while you live in the UK is common — a former home, an inherited house, or an investment. It also puts your rental income squarely in two tax systems: the US taxes it because the property is US-situated, and the UK taxes it because you are UK resident on your worldwide income. The good news is that a key US election can turn a punitive flat tax into ordinary, deduction-friendly taxation, and the US/UK treaty stops you paying twice. This guide explains how to file correctly on both sides.
Why the US taxes your rental at all
US-source income — including rent from US real estate — is taxable in the US regardless of where the owner lives. If you are a US citizen you file a Form 1040 reporting worldwide income anyway; if you are a non-citizen UK resident (for example a British landlord who owns a US property), you file a Form 1040-NR reporting your US-source rental. Either way, the US has first taxing rights over income from property located on its soil, so the US return is where the rental analysis begins.
The 30% trap — and the 'net election' that fixes it
By default, US-source rental income paid to a non-resident is treated as 'fixed or determinable' income and taxed at a flat 30% on the gross rent — with no deductions for mortgage interest, repairs, management fees or depreciation. That is brutal: 30% of gross rent can exceed your actual profit. The fix is the section 871(d) 'net election', which treats the rental as income 'effectively connected' with a US trade or business. Once elected, your rental is taxed on its net profit at ordinary graduated rates, with all the normal deductions — usually a far lower bill, and often little or no US tax at all after expenses and depreciation.
Deductions that bring the bill down
Once you are taxed on net rental income, you deduct the ordinary costs of letting the property: mortgage interest, property taxes, insurance, repairs and maintenance, management and letting fees, and travel to the property within limits. You also deduct depreciation — and that is the big one.
- Mortgage interest on the rental loan.
- US property taxes and insurance.
- Repairs, maintenance and cleaning.
- Letting agent and management fees.
- Depreciation of the building (not the land).
Depreciation: the deduction you can't skip
US tax requires you to depreciate residential rental buildings over 27.5 years, deducting roughly 1/27.5 of the building's value each year. This non-cash deduction often wipes out the taxable profit, which is why many US rentals show little or no US tax once the net election is in place. Importantly, depreciation is effectively mandatory — when you sell, the US 'recaptures' depreciation you were 'allowed or allowable', so failing to claim it does not avoid the future tax, it just wastes the deduction. Claiming it properly each year is part of getting the long-term numbers right.
How the UK taxes the same rental
As a UK resident you are taxable in the UK on your worldwide income, including the US rent. The UK has its own property-income rules: you compute the profit under UK principles (which differ from the US — for example, the UK restricts mortgage-interest relief on residential lets to a 20% tax credit, and the UK does not give depreciation on the building). So the same property can show a small US profit but a larger UK profit, because the two systems allow different deductions. You report the US rental on the UK Self Assessment foreign property pages.
Avoiding double taxation with the Foreign Tax Credit
Because both countries tax the same rent, relief comes through foreign tax credits under the US/UK treaty. The US has the primary right to tax income from US property, so typically you pay US tax first and the UK gives credit for the US tax against the UK liability on that income. Where US tax is low or nil after depreciation, the UK may collect most of the tax — the credit simply prevents you paying the full amount twice. Coordinating the two returns so the credits line up correctly is where cross-border expertise earns its keep; our guide to the Foreign Tax Credit versus FEIE covers the general mechanics.
Withholding and the role of your tenant or agent
There is a practical wrinkle: because the default is 30% withholding on gross rent, a US property manager or tenant can be required to withhold and remit that tax unless you give them a properly completed withholding certificate (Form W-8ECI) confirming your net election. Filing the election and giving your agent the right form prevents over-withholding at source, so you are not waiting until your return to recover tax you never really owed. Getting this set up before the rent starts flowing saves cash-flow pain later.
When you sell: FIRPTA and capital gains
Selling a US property as a non-resident triggers FIRPTA — the Foreign Investment in Real Property Tax Act — under which the buyer generally withholds 15% of the gross sale price and remits it to the IRS, pending your actual gain calculation on a US return. You then report the capital gain (including depreciation recapture) and reconcile the withholding. The UK will also tax the gain, with treaty credit relief. FIRPTA withholding is on the gross price, so it can far exceed the real tax — making it essential to file and reclaim the excess, and to plan a sale in advance.
Don't forget reporting and the FBAR angle
A US rental often comes with a US bank account for the rent, which can interact with your FBAR and FATCA reporting once your non-US accounts are in scope, and a US property held through any entity can add further forms. The rental itself is reported on Schedule E (for citizens) or the 1040-NR (for non-citizens), with the net election attached. Keeping clean records of rent, expenses and the depreciation schedule from year one makes every subsequent filing — and the eventual sale — far smoother.
Get both returns working together
A US rental owned from the UK is very manageable once it is set up correctly: make the net election, claim depreciation, file the US return, then report the same rental in the UK with credit for the US tax. The mistakes that cost money are missing the net election (and suffering 30% on gross), forgetting depreciation, mishandling FIRPTA on sale, or letting the US and UK returns drift out of sync. A US/UK tax specialist can set the structure up once and keep both filings aligned each year.
