The cooling U.S. housing market makes U.S. real estate more attractive for foreign cash buyers. Sometimes it only takes foreign cash buyers a week or two to close on their property, but when it comes to selling the property, the process can be more complicated. I will explain below some of the most common tax pitfalls that first time foreign property sellers may not have accounted for. If you have friends or family who are non-US residents looking to sell their US property, don’t forget to let them know.
Foreign sellers should not rely on agents for tax matters
Foreign sellers often do not have the time to participate in the process of selling their property in the U.S., so they sign a power of attorney (POA) that gives their U.S. agents the authority to sell the property and complete the transactions for them. Even though the POA grants the agents authority to deal with financial and tax matters for the foreign sellers, the agents typically fulfill their obligation by obtaining the Statement of Withholding on Dispositions by Foreign Persons of U.S. Real Property Interests (Form 8828-A) for the sellers. Unless otherwise stated in their contract, agents are not responsible for helping their foreign clients to properly file their taxes. Ideally, foreign sellers should obtain an ITIN before closing in order to make their tax filings easier, however, this is not required for the closing to be completed, so agents may not push their clients to do so. First time foreign sellers who take a hands-off approach while letting their agents handle the entire process may only later realize that they failed to obtain an ITIN before closing. They will then have to apply for an ITIN after closing and go back to the IRS to update their 8828-A form before they can file their taxes, which can be very time consuming.
15% of the sale price is withheld at closing with no exceptions
First-time foreign home sellers who are not aware of the 15% withholding rule will be surprised to find that they did not receive the full selling price at closing. Under FIRPTA, a foreign person disposing of a U.S. real property interest must have 15% of the amount realized withheld. For example, if a foreign seller sold his real estate last year for $1 million, he would only receive $850K at closing. This withholding applies even if the seller had taken a loss after previously purchasing the home for $1.2 million. In cases like this example where the seller expects to be refunded their entire withholding, it is even more crucial for the seller to obtain an ITIN and properly file their taxes.
Do not miss the easier alternative of obtaining an ITIN from abroad
Obtaining an ITIN is the first step for foreign sellers to file their taxes, because the IRS needs to be able to associate foreign sellers with their property sold. To obtain an ITIN from abroad, many CPAs would tell their foreign clients to mail their original ID documents to the IRS with a W7 or a certified copy of the document from the issuing agency and then mail the certified documents with the W7 to the IRS. However, who would want to risk mailing the original copy of their ID overseas or dealing with a government agency just to get their ID certified? There is actually an easier alternative to this – get the ID documents certified by a Certifying Acceptance Agent (CAA) in the country the seller resides. The IRS provides a list by country of their Certifying Acceptance Agents.
If you did not have your ITIN by the time of closing, you need to obtain an updated version of 8828-A Form
If a foreign seller failed to obtain their ITIN by the time of closing, the 8828-A form of course would not have an ITIN filled in. The reason IRS asked foreign sellers to file 8828-A together with their 1040NR is that both forms will include the sellers’ ITIN allowing them to associate the seller and the property, so the 8828-A form without your ITIN will be unacceptable to the IRS. After obtaining an ITIN, foreign sellers will then need to contact the IRS to provide them with their new ITIN and obtain an updated version of their 8828-A form. Note that if you and your spouse owned the property together, each spouse will need a copy of 8828-A with his/her name and his/her ITIN and the withholding amount will be split to half with 50% withholding (as well as future refund) allocating to each spouse. This is because married filing jointly status is not available for non-resident married couples and each foreign seller spouse will need to file his/her taxes separately.
Withholdings can only be refunded to a U.S. bank or investment account
When foreign couples buy U.S. properties, the payment can be transferred from one spouse’s bank account and both spouses can be named as owners of the property. However, if the two spouses are both owners of the property and only one spouse has an individual bank account in the U.S., the couple will only get 50% of the refund because the other half of the refund that is allocated to the other spouse can only be refunded to a U.S. bank or investment account with that spouse’s name as the account owner. Therefore, foreign couple who sell U.S. property together need to make sure that they either have a joint account or each one has his/her own bank/investment account in the U.S.
Be wary of local professionals who take advantage of their information asymmetry
Filing taxes in the US can be intimidating, especially for foreign non-residents who have never done so before. Unfortunately, you must be wary of professionals who take advantage of their information asymmetry. I know foreign sellers who were asked for a $25K fee by a CPA for filing the taxes for their property sale, when their tax forms would only take a tax or finance professional less than 3 hours to complete. So, when working with a U.S. professional for the first time as a foreigner, one should not simply assume that a higher rate implies better services – some professionals may be charging a higher rate just because they can.
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