Non-residents can acquire and invest in real estate in the U.S. by sending money over to purchase property located within the U.S. or by purchasing property while physically present in the U.S. Either way, Uncle Sam must get his cut. The law that governs these investments is the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA).
When the Seller is a non-resident, Buyer is responsible for withholding 10% of the Purchase Price, and reporting to the IRS on IRS forms 8288 and 8288-A (IRS will then send Buyer a stamped copy of the 8288-A and Buyer will give a copy to Seller). The forms and money must be sent to IRS within 20 days of the Closing date, or there might be penalties to the Buyer. Seller must have a TIN (Taxpayer Identification Number) prior to the closing date and can apply for one on the IRS website. These additional requirements are put on the Buyer to ensure that the U.S. government gets the taxes due from the Seller. Since the Buyer is the one bringing funds to the table, Buyer is in a better position to withhold some of the funds and send that directly to the Internal Revenue Service.
If Buyer or Buyer’s agent suspects that Seller is a non-resident of the United States, Buyer must ask Seller directly if he/she is not a U.S. resident. If Seller maintains that he/she is a resident of the United States, Buyer must get an original notarized statement from Seller stating that the seller is not a foreign person and showing seller’s U.S. Taxpayer Identification Number (usually a Social Security Number). Buyer would then have no obligation to withhold any funds, or report anything to IRS. However, Buyer must keep an original copy of the signed Seller’s Statement of Residency. Even when Seller is a non-resident, there might be exemptions that allow the Buyer to skip the withholding altogether.
The 2 Most Common Exemptions are:
- If there will be no cash to seller (no profit). Seller will need to apply for a withholding certificate from the IRS that will grant Seller the exemption on the transaction using IRS form 8288-B. Seller must give Buyer a stamped copy as proof, and Buyer will then send all the forms in to IRS within 20 days after Closing.
- If the total sale price is $300,000 or less, and buyer or buyer’s family will be living in the house for the next 2 years. Buyer must sign an affidavit stating that the purchase price is under $300,000 and the buyer intends to occupy. The Title Company will usually provide a Buyer’s Affidavit of Intent to Reside. If not, have a real estate lawyer provide one to you. All parties must keep an original copy of the signed Buyer’s Affidavit of Intent to Reside but there will be no need to send any forms to IRS.
If there will be a profit to Seller, and Buyer will not be living in the house for the next 2 years, then Buyer must withhold 10% of the Purchase Price through the escrow officer, unless there is another exemption available. (15% for all distributions after February 2016). The escrow officer will send the funds to the IRS within 20 days of Closing. To avoid penalties, Buyer should make sure that the escrow officer at the Title company gets this done timely.
Lastly, remember that there are other exemptions not covered in this post. Contact a real estate lawyer or tax lawyer for help with figuring out if Buyer or Seller qualifies for any other exemption. Even when there is an exemption, the non-US resident Seller is still required to file a U.S. tax return to report the sale and then some taxes may still be due at that point. Sellers should seek guidance from their accountants or CPAs.