As a foreign government or international organization employee, you might be exempt from paying US taxes on your personal income. So you might be wondering why you have been registered for taxes or expected to file and pay taxes to Washington, D.C. The reason is you are exempt from paying taxes on your personal income.
However, DC considers the renting of property to be a business function, no matter how few or many rental properties you have and no matter if that property or properties are owned by one person, by a few people, by a trust, or by a business entity. This is also why you had to obtain a business license to rent your property legally. Thus, all income derived from the rental is considered business income, which is not exempt from taxation based on the Vienna Convention on Diplomatic Relations, the Vienna Convention on Consular Relations, or International Organization Agreements
Business taxes can be levied by the jurisdiction where you are conducting business (in this case, D.C.), forcing you to pay taxes to that jurisdiction on the business income, and this is why you would need to file the returns in D.C. and pay taxes.
RentJiffy’s thought: this arrangement where rental income is considered business income seems to be unique to D.C. We suspect this was intentional by design when the D.C. City Council implemented the law that included rental property as part of the business license categories in the late 1990s. You see, DC is one of the most transient places in the world. Almost 60% of residential homes are not primary residences, meaning most property owners are not D.C. residents. Thus, they would not report the rental income or pay taxes to D.C., so they would not get tax revenue. By considering it a business activity, D.C. ensures they get the income taxes on the rental income.