Question

Donna rents an office from Don Juan, a Bahamian citizen. The lease is a triple-net lease so that Juan is not engaged in a US T or B. The annual rent is $10,000 and the lease says that she is required to mail the rent payments to Don without any deductions. So, Donna sends a check for $10,000 to Don Juan. You tell Donna that the payment was subject withholding. She tells you that then she will pay the withholding tax from her own funds. What are the tax consequences here to the parties?

Answer 1

Here the rental agreement is a Tripple-net type(NNN). Which means the tenant or the lessee is responsible to pay all the real estate related Taxes (including withholding taxes), building insurance and maintenance. These expenses are in addition to any other related expenses like rent, utility etc.

Hence in the situation given, the lease agreement is NNN type, the tenant (Donna) will be responsible to pay the withholding tax. Donna can calculate the withholding tax after deducting the below-shown expenses from the total rental amount;

• Property insurance cost
• Property Management Charges
• Any real estate broker fee, Etc.

What is Withholding Tax?

Withholding tax is a tax under US Tax Laws levied on a foreign person for their Non-business income from the United States sources. Generally, the percentage of the tax is 30%. Normally this tax is deducted at the source

Eg. For the employees, the employer will be deducting this tax from the salary amount and the employer will pay it to the tax authorities.

Conclusion;

So the tax consequence on Donna will be the withholding tax expenses. And there is no Tax burden on Juan.