Foreign Buyers and Sellers of U.S. Property–Take Note!

The Hilton Head Island vicinity enjoys the presence of many individuals from the United Kingdom, South Africa, Canada, and many other fine countries.  Foreign visitors often purchase real estate to use for both personal purposes and short and long term rentals.

Foreign persons who own real estate in the United States are faced with income tax withholding and/or reporting requirements for the years they rent their property.  They may also be required to report any gain or loss incurred at time of sale even when the property was not used as a rental.  Reporting requirements are only remotely similar to those imposed on U.S. Citizens.  There are additional penalties via lost deductions for foreigners that fail to file timely tax returns.

Property managers may find themselves in the unique position of becoming withholding agents for all foreign property owners whose property they manage.  Property managers are responsible for a 30% tax withholding on gross proceeds and periodic payments to IRS for withheld funds.   Property managers and Realtors may want to advise their foreign clients to obtain tax identification numbers simultaneous to buying a property and well in advance of selling a property (ideally by listing date).  Use Form W-7 to apply for a Federal tax identification number.

Foreign property owners who rent out their unit have a choice in tax withholding:

• They may have their rental income taxed as an investment through 30% withholding, or

• They may be taxed on a net income basis as “effectively connected with a U.S. trade or business” without having 30% withheld.  The owner may then have to file estimated tax returns and will have to file a tax return 1040NR to report their U.S. income.  To suspend the 30% withholding requirement, the foreign owner will have to complete Form W-8ECI and submit to the withholding agent (property manager).

The withholding agent must report gross income and withheld taxes on Form 1042-S, Foreign Persons U.S. Source Income Subject to Withholding.  This Form must be filed by March 15 of the following year.

Per IRS – a withholding agent is any person, U.S. or foreign, that has control, receipt, or custody of an amount subject to withholding.  The withholding agent may be an individual, corporation, partnership, trust, association, or any other entity.  The Broker-in-Charge or Property Manager in Charge are examples of withholding agents.

When foreigners sell their property, the buyer (or his agent/attorney) has the responsibility of withholding 10% of the sale price and remitting this amount to the IRS as a withholding tax.  The seller would then file an income tax return (Form 1040NR) and make claim to their refund or pay any additional tax due.  If the seller is able to demonstrate to the IRS that no tax liability exists, the 10% withholding can be waived.  Use Form 8288-B – Application for Withholding Certificate for Dispositions by Foreign Persons of U.S. Real Property Interest.  There are other exceptions that may prevent withholding, including sales values of $300,000 or less coupled with the buyer’s intent of non-rental use of the purchased property.

Links to IRS tax Forms:

Links to IRS Explanations:

ITIN (Individual Tax Identification Number) Guidance for Foreign Property Buyers/Sellers

Foreign Persons Receiving Rental Income From U.S. Real Property

This article is intended for general informative use only, and is not to be considered specific tax instruction or advice.  If you feel the information in this article is applicable to your situation, please contact Greg Bennett CPA, PA or your current tax adviser.

Thursday, October 6th, 2011, by admin.