In recent years, the real estate market in the United States has attracted the attention of international investors, especially those from Latin America, due to its stability, profitability, and legal certainty. However, it requires understanding the tax environment that regulates this type of transaction. And this is where it’s important to know what is the IRS (Internal Revenue Service).
Below, we’ll tell you all the details on this topic.
What is the IRS exactly?
The IRS is the federal agency responsible for administering the United States tax system. If you’re familiar with the SAT in Mexico or the DIAN in Colombia, their function is very similar. It involves collecting taxes, enforcing tax law compliance, and processing tax returns.
What is the IRS, and what are its main functions?
To start, it is important to highlight the main functions of the IRS, which are:
- Collecting federal taxes from individuals and legal entities.
- Processing annual tax returns and other related forms.
- Overseeing tax compliance for both residents and foreigners.
- Issue refunds and applies penalties when necessary.
IRS Relationship with Foreign Investors
Any person or entity that generates income in the US, regardless of their nationality or place of residence, is subject to tax obligations with the IRS. This includes foreign investors who receive rental income, sales income, or capital gains derived from property held in the US.
For example, if you buy a home to rent, sell in the future, or hold it as an asset, the IRS will be involved in every stage of your real estate transaction. Therefore, it is vital to understand how this agency works and what requirements it entails.
What is the IRS and how does it impact your real estate investments?
While investing in real estate in the US can be an excellent strategy to diversify your assets and generate passive income, it also entails a series of tax responsibilities that should not be overlooked. These are some of the ways the IRS intervenes in your operations:
1. What is the IRS and its impact on property rentals?
When you rent a property in the United States, you are generating income that must be reported to the IRS. This income is subject to federal taxes (and, in some states, state taxes).
The good news is that there are tax deductions that can help you reduce your tax burden. These include operating expenses, maintenance, insurance, mortgage interest, property depreciation, among others.
2. Gains from the Sale of Property
If you decide to sell a property, you will have to pay capital gains taxes. The IRS distinguishes between short-term gains (less than one year of ownership) and long-term gains (more than one year). The tax percentage varies based on this criterion.
3. What is the IRS and Foreign Withholding?
Under FIRPTA (Foreign Investment in Real Property Tax Act), if you are a foreigner and sell real estate in the U.S., the buyer is required to withhold 15% of the gross transaction price. The buyer must then remit this tax to the IRS as an advance tax payment. This applies even if the transaction generated minimal gain or loss.
4. Annual Returns
In many cases, even if you don’t generate active income from a property, you may be required to file an annual information return. This allows the IRS to maintain control over foreign assets in the country and helps you keep your documents in order.
What is the IRS: tax obligations and documents
To comply with IRS regulations, it is essential to know the documents you need to manage. Here we explain the most important ones:
ITIN (Individual Taxpayer Identification Number)
If you don’t have a Social Security Number (SSN), you will need an ITIN to file your tax returns. To fully understand what is the IRS, you should know that this number and is essential for all foreigners who earn income in the US.
Form W-8BEN or W-8ECI
Depending on whether your income is connected to a business activity in the US, you will need to complete one of these forms.
The W-8BEN is used to report passive income, while the W-8ECI applies when there is a direct economic connection to a business activity.
Form 1040-NR
This is the federal tax return that non-residents with income in the US must file. It includes all income earned during the tax year and allows for the application of applicable deductions.
Form 8288
In the case of a property sale under FIRPTA, this form is used to report and remit the 15% withholding tax mentioned above.
Having these documents and keeping them up to date will allow you to operate legally and protect your investment from any IRS review.
What is the IRS: Best Practices for Compliance
Complying with IRS tax requirements is not only a legal obligation, but also a key strategy for protecting and growing your assets over time. Proper tax management will allow you to anticipate tax burdens, take advantage of legal benefits, and avoid penalties that could jeopardize your investment.
Below, we share some fundamental best practices for any investor in the U.S. real estate market:
1. Consult with an accountant who understands the IRS
Taxation in the US can be complex, especially for foreign investors. An accountant with experience in international investments is familiar with IRS regulations and tax treaties between countries and can help you choose the most appropriate tax structure for your situation.
This advice not only ensures legal compliance but can significantly reduce your tax burden, thus improving the profitability of your investment.
2. Keep all relevant documentation
Saving and organizing your documents is a basic but essential practice. This includes lease agreements, tax payment receipts, invoices for maintenance services, insurance, property improvements, and bank statements.
In the event of an audit or review by the IRS, this documentation will support each figure declared. Additionally, keeping your files organized facilitates accounting work and the correct application of tax deductions.
3. Once you know what the IRS is, evaluate your legal structure
One of the most important decisions before investing is how to do so: as an individual or through a legal entity. In many cases, establishing an LLC (Limited Liability Company) can offer significant advantages. For example, personal asset protection, simplified tax filing, and greater flexibility in distributing income.
Alternatively, using a trust or corporation can also be beneficial depending on your goals, investment amount, and country of residence. Having an appropriate structure in place from the start helps you avoid future complications.
4. Knowing the IRS allows you to take advantage of tax deductions
The U.S. tax system allows you to deduct numerous expenses related to real estate. These include:
- Mortgage interest.
- Maintenance and repair expenses.
- Property management fees.
- Fire or disaster insurance.
- Depreciation of property value.
- Property, state, and local taxes.
By correctly applying these deductions, you can reduce the taxable income on which the IRS calculates your taxes, representing considerable savings year after year.
5. Declare all your income, without exception
One of the most common mistakes among foreign investors is underestimating the importance of declaring all income. Failure to do so can lead to penalties, accrued interest, or immigration restrictions in some cases.
So, what is the IRS? It involves understanding the importance of transparency. Even if the income doesn’t generate taxes due to some exemption or deduction, its omission can be considered a serious offense.
Declare all your income. In fact, if you think a transaction is tax-exempt, it’s always best to file a tax return to avoid future penalties.
Your real estate investment receives legal support with PFS Realty Group
At PFS Realty Group, we know that the process can seem complex at first, especially when it comes to tax issues. That’s why we offer a comprehensive solution that supports you every step of the way:
- Search and selection of properties in strategic areas with high profitability potential.
- Management of your property, ensuring its good condition and compliance with legal and tax regulations.
- Tax optimization through a network of accountants specialized in foreign investments.
Additionally, we offer specialized accounting and legal advisory services for international investors, helping you comply with all IRS regulations and ensure your investment is always in compliance.
What is the IRS and why it involves investing wisely and with support
The real estate market in the United States offers extraordinary opportunities for those looking to build solid assets. However, doing so without knowing the rules puts your investment at risk. The IRS is a key player in this scenario. So, understanding its requirements will allow you to operate with complete peace of mind.
Now that you know what is the IRS, our team is ready to help you build a solid tax strategy. Learn how PFS Realty can help with your accounting and legal advice and start investing with confidence.
References
- IRS (2025). Información sobre el IRS | Internal Revenue Service.
- IRS (2025). Los impuestos a extranjeros no residentes.
- Segal, T. (2025, April 1). What Is the Internal Revenue Service (IRS)? Investopedia.