Tax Insights

The depressed value of US real estate and the devaluation of the US dollar have created an attractive market for foreign investors seeking real estate bargains. Some look to make a quick profit by “flipping” the real estate while others become landlords. US persons that make payments to these foreign individuals need to be aware of the requirements to withhold and submit a portion of these payments to the IRS.

In order to ensure payment of US taxes, there are specific tax withholding requirements for payments made to foreign individuals. The IRS generally requires a 10% withholding on the sale proceeds when US real estate is purchased from foreign persons. Known as FIRPTA withholding, these taxes must be turned over to the IRS in 20 days following the sale. Similar withholding must be made on payment of rents to foreign landlords. Failure to withhold these taxes subjects the purchaser of real estate and the lessee to personal liability for the tax.

There are a few exceptions to the withholding requirements. Withholding is generally not required where the payment is made to acquire real estate for use as a personal residence and the purchase price is less than $300,000. However, if the purchaser fails to use the property as a personal residence for the required time-frame the foregone withholding would be due. Withholding is also not required where the seller provides “certification” that he/she is a US person or provides written notice that he/she would not be subject to tax. Both the “certification” and the notice must comply with specific IRS information and reporting requirements.

In summary, when making payments to foreign individuals, withholding requirements must be considered. Failure to properly withhold can saddle the payor with responsibility for the tax. The US government has little to no authority to enforce collection against a foreign person and will therefore, pursue the US payor for the tax.

The above article is general in nature and should not be relied upon for any purpose. Please contact us if you require specific advice in this area.

Robert McCanless, CPA