A, a U.S. Income tax nonresident alien, owns awarehouse which is triple net leas

Question

A, a U.S. Income tax nonresident alien, owns awarehouse which is triple net leased to FLACO, a Florida company. Assume that A's rental activity does not constitute a U.S. trade or business , A does not make the real estate net election, and that FLACO pays A stated monthly rent of $10,000. Further assume that pursuant to the lease, FLACO pays $20,000 in annual real property taxes and $15,000 in annual mortgage interest payments, both such sums attributable to A's ownership of the warehouse. If A's rental activity constituted a U.S. trade or business, or had A made the special real estate net election under IRC §871(d), the warehouse would have depreciated at $25,000 per year. FLACO must withhold U.S. income tax of: (Explain your answer)

A)$36,000

B)$28,500

C)46,500

D)39,000

Explanation / Answer

46,500 (which is Option C)

___________

Explanation:

Since, it has been clearly specified in the question that A's rental activity does not constitute a U.S. trade or business and A does not make the real estate net election, the entire amount of gross income will be subject to tax at the rate of 30%. In the given case, the gross income will include the amount of monthly lease rent, property taxes and interest on mortgage paid by FAlCO resulting in a total figure of $155,000. At a tax rate of 30%, the amount of tax to be withheld would be $46,500 (155,000*30%). The advantage of depreciation deduction will not be available in this case.

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