vacation area such as Florida or Colorado.

The condominium may be used by the owner for personal use, or loaned to friends or relatives for part of the year. Then it is rented for the remainder of the year, primarily by using a local realtor as the rental agent. The realtor typically collects the rent and charges a management fee (usually a percentage of the rent), and may also make the mortgage payments each month or pay the utility bills. This seemingly innocuous transaction raises a number of complex tax issues.

Since you are a foreign national owning real property in the United States, the rental agent is obliged to withhold 30 percent of the gross rental income and transfer these funds to the Internal Revenue Service (IRS) as a prepayment of your taxes. The IRS has recently made it known that it is aware that many rental agents are not properly withholding tax, and has stated that this is an area that will be given increased attention in 1996. There is incentive for the IRS to crack down in this area because it can impose a penalty of up to 100 percent on the realtor for failure to withhold the 30 percent tax. Thus, if the rental income is $10,000 and the realtor should have withheld $3,000, a $3,000 penalty could be imposed on the realtor.

There is no good reason to allow the IRS to withhold 30 percent of your income and keep it as the tax due. You can (and probably should) file a US individual income tax return (Form 1040NR) and make an election to treat the rental property as a trade or business. This election will only apply to the rental property and will not affect the character of your other investment income in the US. By making this election you can then deduct against the rental income all of your expenses, such as mortgage interest, real estate taxes, insurance premiums, maintenance, utilities, the cost of your traveling to the property (in certain cases) and depreciation. In most instances, this will produce a paper tax loss and you will obtain a complete refund of any taxes withheld.

However, if you and/or your friends use the property for 14 days or ten percent of the days the condominium is actually rented, whichever is greater, the above noted expenses must be allocated between personal and business use.

This might result in your having taxable income. If the rental property is your only income from the US, your tax should be quite low, since each individual is entitled to a personal exemption of $2,550, and the tax on the first $20,050 of taxable income is at 15 percent. If you are married to a non-US persona and the condominium is in joint name, each of you needs to file a separate return. In most cases, the actual tax paid (if any) from filing a return will be much less than allowing the IRS to keep 30 percent of your rental income.

Married to a US Citizen or Resident Alien It is common practice for a married couple to put a vacation home in joint name. But, if you are married to a US person and do not file a joint return, this could cost your spouse additional taxes. For example, if you have a rental property that has a net loss of $16,000, you must divide the loss between the two spouses. If the Bermudian national files a return showing an $8,000 loss and has no other US source income, there is simply no tax to pay.

But the US spouse can only use $8,000 of the loss to offset her global income.

If the property were only in the US spouse's name, she could use the entire $16,000 loss to offset global income. This would save her at least $1,200 in tax and possibly $3,200, depending on her other income.

Estate Taxes Often overlooked is the US estate tax aspect of the transaction. A foreign national owning real property in the United States only has a $60,000 exemption from US estate taxes. Any US situs property over that amount is taxed at graduated rates which range from 26 percent to 55 percent. For example, if the property had a fair market value of $100,000, the estate tax would be about $11,000. If a property is owned in joint name with a non-US spouse, each of you is entitled to a $60,000 exemption. However, if the jointly owned property has a fair market value of more than $120,000, and the property is left to the surviving spouse, estate taxes are due immediately unless the property is put in a "Q-Dot'' trust which will defer the tax until the demise of the surviving spouse.

Planning The use of an offshore corporation to invest in US real estate can be advantageous if the investment is significant. Otherwise, US estate taxes can be minimised by setting up a life insurance trust to pay estate taxes. If you need further information, two useful publications are No. 519 (US Tax Guide for Aliens) and No. 527 (Residential Real Property) which can be obtained by writing to the Internal Revenue Service, Eastern Area Distribution Center, P.O. Box 25866, Richmond, VA 23286-8107.

The tax advice given in this column is, by necessity, general in nature. You should, of course, check with your own US tax consultant as to how specific transactions affects you since tax advice varies with individual circumstances.

James Paul Sabo, CPA, is the President of Expatriate Tax Service, P.O. Box 617, Bernardsville, New Jersey and is associated with Gulfstream Financial Ltd. in Bermuda.