United States of America has one of the biggest and most flourishing markets of property and real estate. People within the USA and outside of it show extreme interest in the buying and selling of properties. In addition, regardless of the fact that there are so many rules, laws and decrees pertaining to the buying and selling of estates in a real estate market of the United States, the profit and financial advantage is such that people follow through to actively invest and earn. However, there is one issue, understanding and following through these rules need in-depth understanding of terms and procedure that has been Imposed by the internal Revenue Service. Even more so when the interested party is foreign. The rules and tax impositions for them are most complicated because, for a foreigner selling property in the USA implies that they also pay the taxes and follow through an entire another set of procedure to legalize their investments and trade in real estate.
It is not something to take lightly though, because even a slight mistake or gaffe might end up being very expensive. To make sure you follow a straight, hassle-free, and legal road to foreign buying and selling, read on to learn everything there is to learn about a foreigner selling property in the USA.
Here we go:
Who are foreigners?
Though you will find the official statement and definition of term foreigner according to the IRS here is a little laidback version. Foreigners in the USA are the ones who are a nonresident alien individual, a foreign trust, a foreign corporation, foreign partnership, a foreign estate, or just anyone who is not officially a permanent resident and citizen of the USA.
Keep in mind that even a foreign branch of a US’s institution is considered intermediary but most often treated as a foreign entity.
- Nonresident Alien
A person who is neither a US citizen nor a resident alien is termed as a nonresident alien. Those foreigners who are under the residence article of an income tax treaty are called nonresident alien and are subject to withholding.
- Married to U.S. Citizen or Resident Alien
Those nonresident aliens who are married to a permanent citizen or US resident might be treated a resident alien except for certain income tax purposes.
Let’s have a look at some of the official regulations that declares a person a non-citizen of the USA and a foreigner:
- Those who are not citizens of the USA
- Those who do not possess a green card and are not US permanent resident alien
- Those individuals who are not protected by the state for instance refugees or one when political asylum.
- Those companies, businesses, and corporations that are not organized or incorporated under the United States Law.
- Those government agencies or subdivisions that belong to a foreign government.
To get a clearer understanding of foreigners or of those who are under some sort of confusion may find it even more helpful to know who the US citizens are. Here it goes:
- Those individual who have been granted a U.S. permanent residence i.e. green card holders
- Those individual who have been granted status of a protected person
- Those corporation, companies, trades, organization and groups that have been incorporated in the United States of America under the U.S. law
- Those individual who have been granted an official and legal U.S. citizenship.
The legal requirements to be fulfilled by a foreigner selling property in the USA:
According to the USA Law, it is required by all the non-resident aliens who have owned a property in the US and has now sold it is subject to withholding. This withholding is imposed for the purpose of tax collection and the rate is the 15% of the gross sales price.
This is the official and basic rule of FIRPTA act or as extensively called The Foreign Investment in Real Property Tax Act of 1980.
Now this 15% of the gross sales price is withheld usually by the buyer and forwarded to the Internal Revenue Service of US. In addition, the buyer or the closings agent is under the requisite to send it over within the next 20 days of the closed deal. Then the IRS keeps this amount with them unless it is confirmed that the non-resident has paid all his overdue taxes to the IRS. These taxes could be anything including the tax on income.
There are number of ways for the foreign seller to claim their withheld money back and they can do it by adopting any of the following ways:
1. Filing a US tax Return:
The first method may include filing a U.S. tax return for every year a rental income was generated in case the house and property was rented and a steady income has been earned from it. When all the reporting of income and expenses have been filed in addition to the final return that is reporting the selling of the property altogether then a foreigner can expect to acquire their withheld amount back in twelve to eighteen months. The procedure and the time of the tax year also plays its part.
2. Filing the Form:
Another and more popular method that can be adopted by a foreigner selling property in the USA is filing the form 8288-B. This form is available on the official page of IRS and allows an exemption from withholding when supporting documents have been submitted alongside the form 83288-B. What happens in this case is that the 15% FRPTA rate remains in the hands of the closing agent while on the other hand the Internal Revenue Service keeps on with the checking procedure of the withholding application and subsequently issues a Withholding Certificate for the cleared funds to the foreigner. This process is swifter and faster and most probably takes up to 3 months.
Make note of the fact that filing a US income tax return report is mandatory and the fact that you might or might not report for the withheld amount does not exempt you form that requirement. Therefore, no matter which of the above methods you use to get your withheld amount back, you are still liable to file your income tax return report. If all is done right, there’s a chance that the foreigner selling property in the USA might even receive a further refund.
For those foreigner selling property in the USA who needs to file for an early release of their FIPRTA withholding, must prepare and file the following documents with the form:
- Copy of settlement statement from buying of property in the USA.
- Copies of the previous year’s tax returns already filed to the IRS.
- Copy of furniture package invoice or approximate value if included in the buying price
- Copies of invoices/receipts for all the primary improvements, renovations, upgrades done on your property
In the situation where tax returns were not filed in the prior years, the foreigner selling property in the USA will need the following documents:
- Particulars of income received and expenses incurred during the span of ownership
- The U.S. Taxpayer Identification Numbers (ITINs)
Attaining an ITIN number:
Nothing can be done in USA including any investments or trading can be done unless the foreigner selling property in the USA has an ITIN number. If they don’t then they’ll need to follow the official procedure and attain one as soon as possible.
Here it goes:
The foreigner selling property in the USA needs to fill the W-7 form completely and they’ll need to submit this to the IRS with the notarized copies of the picture pages of the foreigner’s passports
Make notice that if the foreigner selling property in the USA wants to fulfill the requirements of internal revenue service properly and attain the FIRPTA withheld amount as soon as possible, they must make submissions of the FIRPTA before the day of closing or on the day same as that of closing. Even better advice is to have your accountant contacted as soon as the house get listed for sale so that all necessities are completed and arranged for in a timely manner.
All countries have their own set of rules and laws and while it is far easier to get familiar with your own, it is difficult for a foreigner selling property in the USA to understand the ones of USA properly. Add over the fact that the tax laws of USA are highly complicated and complex and might even need the help of a third party to sort things out properly and in a timely manner, or as we mentioned in the beginning that a tiny mistake can end up being costly.
Few Things to Remember:
Even if the foreigner selling property in the USA is has hired someone to do the job for them, it is still necessary to familiarize themselves with all the tiny details involved in the procedure. Here are some important things to remember;
- US capital gain and recapture income:
It is the duty of the buyer to withhold the FIRPTA amount from the foreigner selling property in the USA and remit the 15% of the gross sales amount from them. They also need to ensure the authenticity in case of any partial or complete exemption from the FIRPTA because in most cases it is the buyer who are held responsible in case of they fail to follow through with the procedure in proper manner. Moreover, once the seller has filed for their withheld amount, they’ll reeve it back after the tax liability has been deducted.
However not all the foreign property owners will be subjected to payments of FIRPTA in USA. The tax imposed on the foreigner selling property in the USA is based on the use of property. For instance, if the property was being used for residing of the owners rather than as a mean of earning an income then they’ll be exempted from the FIRPTA after certain criteria are met.
- Understanding the due dates and obligations of USA tax filing:
Most people don’t understand the entire restriction involving FIRPTA though when you see it from the point of view of the IRS, it makes perfect sense. Since it is nearly impossible for the IRS to keep tracks of foreign sellers and property owners who are outside of their jurisdiction, the FIRPTA is a sort of protection for their own safeguard. No one can shortchange the IRS with the FIRPTA procedure anymore. Any foreigner selling property in the USA has to file their 8288 form within 20 days of the closing and if they don’t they’ll have to lose their 15% on the gross sales amount. And when they do, they’ll get their rightful amount back after tax deductions.
How Does It work for the buyers?
When a regular buyer meets a foreign seller, they need to know where they stand in this scenario. In case of a foreigner selling property in the USA half of the responsibility falls on the buyer. Like all the countries of the world, USA too generates income by taxing. They tax the locals, the residents, the investors, and the foreigners.
This sort of tax is termed as citizen gain tax and is a country wide phenomenon that even implies on the nonresidents because they are conducting their business on the soil of the USA especially when real estate and property dealings are in question. Even citizens of the United States have to pay regular income tax and the foreigner selling property in the USA has to pay in terms of The Foreign Investment in Real Property Tax Act (FIRPTA).
Common Pitfalls to be Evaded by the Foreigners Selling Property in USA:
There are various states in USA whose real estate market are hot and in demand. Foreign or residents, no one with cash ignores it or fail to notice it and at the first sign of profit mark their aim and start looking for properties to buy or sell. For instance, there is Florida. The perfect weather conditions, high standards of living and other conveniences has made it a major real estate market and properties sell like cake there, unfortunately many sellers –and buyers– in the dreams f earning some big bucks began to fall to the same pitfalls others have been falling for years. Let’s discover the pitfalls a foreigner selling property in USA should stay aware of:
· Title of the Property:
It is a huge conundrum for the foreign sellers and buyers. Most new timers find t challenging to decide when the time comes to name the owner of eh property and giving it a title. The answer may seem obvious, because the property should bear the title in the name of the buyer himself, and if it is a foreigner then the title too will be in his name. But things are far easier said than done and in this case too, it is an issue.
On one hand, naming the property in the name of the foreign owner is a good thing so that when he’ll be able to sell it at a good price, the tax on the capital gains will only be 15 % on the condition that the foreigner selling property in USA has waited for at least a year before doing so. But on the flip side, if the foreigner selling property in USA dies while the property is still in his name then according to the laws and regulations of USA, the value of the property will be subject to nearly 45% of tax–maybe more–upon his death.
Though the permanent citizens and green card holders of USA are not subjected to the same law and can even transfer the property to their next of kin upon their death without bearing the grunt of high rates of taxes.
· Tax Identification Number:
We already explained the procedure of gaining an ITIN procedure but many fail to understand its importance. Any foreigner selling property in the USA will have to apply for the TIN number. Acquiring a TIN in USA is pretty easy. W-7 or W-7SP form will have to be filled by the property owner to begin the process. When selling the property, the buyer or an estate agent will demand for a TIN number and in case the foreigner selling property in USA failed to produce it will eventually lose the interested parties.
· Forged Non-Foreign Certificate:
A foreigner is walking on unknown territories and can easily be shortchanged or duped by the residents, which is why they need to be careful. There are many cases where non-foreign certificate produced by the seller has ended up being forged and everyone involved in the transaction end up being on risk including the foreigners selling property in USA
And this is how foreigners selling property in USA can be careful with their transaction and walk on a right and legal path so that their investments and property businesses in USA has a good chance of flourishing.