Foreign Owners Selling U.S. Real Estate – Withholding Tax Provisions You Need to Know
January 21, 2015
By Douglas Kingston
Sales of U.S. real estate owned by foreigners creates special tax considerations. U.S. or foreign buyers who purchase from foreign sellers should take note of tax documents that are applicable for these types of real estate transactions. Among the documents relevant to virtually every U.S. real estate transaction is a certification of non-foreign status. The purpose of this document is to protect the property buyer from liability for I.R.S. withholding tax which applies if the seller is a foreign person.
In order to ensure collection of a foreign person’s tax on disposition of U.S. real property, the I.R.S. imposes withholding and reporting requirements on the buyer, and to a certain extent, on professionals involved in carrying out the transaction. Under this system, although any taxable gain is earned by and thus taxable to the foreign seller, the buyer is essentially liable for the tax if it is not paid by the foreign seller. The required withholding is generally 10% of the gross sales price on the disposition of U.S. real estate.
Buyer’s Withholding and Reporting Obligations
It is the buyer, not the seller, who is obligated for withholding and reporting at the time of the sale. The buyer must report the sale to the I.R.S. on Forms 8288 and 8288-A, and pay the required tax withholding, by the 20th day after the date of transfer. The “date of transfer” is the first date consideration is paid or a liability transferred (excluding payments before title passage such as earnest money and deposits.) This deadline is extended to the 20th day after the I.R.S. accepts or denies a legitimate application for reduction of the amount of withholding if the application is filed on or before the transfer date.
The seller may apply to the I.R.S. for a “withholding certificate” in order to reduce or eliminate the required amount of 10% withholding. If the deadline is missed and tax is withheld, the seller generally must wait until the close of the tax year before I.R.S. will consider a claim for refund (i.e., where the 10% withholding exceeds the actual tax liability). In either case, the seller must file an annual tax return for the disposition-year (for example, on Form 1040NR or Form 1120F) reporting all U.S. income, claiming any 10% withholding as a prepayment of tax, and paying any balance due or claiming any allowable refund. Arizona tax filing also applies (even though Arizona does not presently impose withholding tax, unlike certain other U.S. states, such as California, which do).
Caveat emptor – let the buyer beware! If you are the buyer, make sure you receive a reliable exemption certification from the seller, otherwise withhold a sufficient amount of the purchase price and comply with the I.R.S. remittance requirements. If you are an agent and have knowledge that a seller’s exemption certification is false, provide written notice to the buyer. If you are a foreign seller, determine if an exemption or reduction applies and provide certification to the buyer or apply to the I.R.S. for a withholding certificate before the transfer, and also be sure to file the required Federal and applicable state income tax returns.
More information can be found on www.iTaxCPA.com/articles.