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Foreign Persons Owning U.S. Real Estate

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  • Great article. Thanks for the info, it’s easy to understand. BTW, if anyone needs to fill out an irs form 8288, I found a blank form here http://pdf.ac/6LB6C
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  • 1. GOLDSTEIN JONES LLP ATTORNEYS-AT-LAW Foreign Investors in U.S. Real Estate – Understanding the Key Tax Rules
  • 2. Agenda
    • FIRPTA
      • When does it apply?
      • What are the procedures?
      • Non-residence rules
      • Taxpayer Identification Numbers
      • Exceptions
      • State issues
  • 3. Agenda
    • FIRPTA
      • Agent liability & Affidavits
      • U.S. Real Property Interest
      • De minimis rule
      • Non-recognition & exclusion
      • Withholding Certificates
      • Corporate Issues
    • Real estate income
    • Estate tax issues
  • 4. FIRPTA – What is it?
    • Foreign Investment in Real Property Tax Act 1980 (FIRPTA)
    • FIRPTA's goal is to force non-resident aliens (NRAs) to file U.S. returns and pay tax on U.S. source profits
    • 10% withholding tax on U. S Real Property Interests (USRPIs) sold by income tax nonresidents
    • Tax imposed on amount full amount realized by seller
    • No deduction for expenses
    • Can cause a cash flow problem for seller
    • Duty imposed on buyer (and agent) to withhold tax
    • Certain exceptions apply
  • 5. FIRPTA – When does it apply?
    • Foreign sellers
    • Direct owners or indirectly through a disregarded entity
    • Foreign corporations selling U.S. real property interests also subject to the rules
    • Foreign corporations are subject to 35% tax withholding on distributed gains
    • Foreign corporations may elect US tax treatment as a domestic corporation
    • Caution re LLCs and certain types of trust arrangements
  • 6. FIRPTA – What are the procedures?
    • Forms 8288 & 8288-A record FIRPTA tax withholding
    • Tax is due 20 th day from date of closing
    • Extended if an application for exemption is in progress
    • Penalty of $10,000 for failure to collect and pay tax if buying from NRA
    • IRS has specific FIRPTA Unit handling remittances and exemption applications
  • 7. FIRPTA – What are the procedures?
    • Buyer and agent can reasonably rely on Form W-9 residency certification to avoid withholding
    • Agents acting against direct knowledge is considered unreasonable
    • Taxpayers require counsel concerning the residency certification
    • Nonresident taxpayer must file tax return to claim credit for tax paid or evidence exemption on tax return
    • Seller notifies buyer of application for exemption from tax withholding prior to closing
  • 8. FIRPTA – Nonresident or Not?
    • Real estate attorneys often unaware of tax residence rules relevant to non-US nationals
    • Overview of the rules
    • Seller’s real estate attorney often cannot advise on tax position without recourse to tax attorney/accountant
    • Buyer’s attorney wishes to rely on W-9 only
    • Domestic tax rules (including elections available) and applicable Tax Treaty rules complicate the residence position
    • Selling client is often uncertain whether tax resident
    • W-9 to be signed under penalties of perjury
  • 9. FIRPTA -Taxpayer Identification Numbers
    • In many cases seller remains nonresident but is unaware as to the need for a Taxpayer Identification Number
    • Seller receives no credit for withholding tax without an Individual Taxpayer Identification Number (ITIN)
    • Seller needs the ITIN to file tax return to evidence any exemption from taxation
    • Apply with tax return/ acceptance agent (Form W-7)
    • “ ITIN Applied For” on any IRS Forms is now unacceptable
    • Early communication of the need for these numbers is critical
    • Suggest incorporating language into the real estate contract
    • Tax remains payable even without an ITIN!
  • 10. State Tax Issues
    • State non-resident withholding issues – insurance against non-filers
    • New York requires the payment of tax at marginal rates of tax.
    • New Jersey also requires tax to be paid at marginal tax rates and no less than 2% of gross proceeds.
    • California tax law also requires buyers to withhold 3 1/3% of the total sales price of California real estate. Now extended to all beyond just non-resident sellers.
    • California escrow agents have a duty to inform buyers of this California withholding tax obligation; NJ requires proof of payment for recording of deed
    • Each state has separate rules for exemptions from these obligations and its own procedures
  • 11. FIRPTA- When is Withholding Not Required?
    • FIRPTA withholding is required unless:
      • Seller is not a ‘foreign person’,
      • The interest transferred is not a USRPI
      • The seller is not subject to taxation on the transaction due to an exception
      • The seller qualifies for reduced withholding (i.e. qualifies for a “Withholding Certificate”)
  • 12. FIRPTA – Resident Affidavit
    • Certify that the seller is not a foreign person – Form W-9
    • Must be signed under penalties of perjury and set forth the seller’s name, U.S. Tax Identifying Number and home or office address 
    • Most commonly used exemption procedure (since most transactions do not involve foreign sellers)
    • Buyer (and agents) may reasonably rely on Form W-9
  • 13. Debt Financing – USRPI?
    • Debt financing by original purchaser now selling
    • Purchaser provides credit (i.e. non-equity interest) not considered a USRPI subject to FIRPTA
    • Foreign lender receives portfolio interest not subject to tax to NRA
    • Needs to be a bona fide arm’s length loan arrangement with no “equity” participation
    • Debt obligation has U.S. estate tax consequences to a nonresident
  • 14. FIRPTA – “De Minimis” Exception
    • not required to withhold tax if:
      • 1) the total purchase price for the property does not exceed $300,000, and
      • 2) the buyer must has definite (and carried out) plans to reside at the residence for at least 50% of the number of days the property is in use during each of the first two 12-month periods following the date of the sale.
    • State rules may differ
  • 15. FIRPTA- Withholding Certificates
    • Procedure exists for applying for exemption from withholding requirement
    • IRS Form 8288-B requiring statement of tax law and facts evidencing tax exclusion
    • Buyer relieved of responsibility, seller’s cash flow improved!
    • Applications subject to understanding tax residence position, application of exemption rules to nonresidents
    • Full disclosure on IRS Forms which may take 90 days to process
  • 16. FIRPTA- Withholding Certificates
    • Bona fide applications in process will delay payment of withholding taxes (kept in escrow until notification received from IRS)
    • Typical cases are principal residence sales, like-kind exchanges
    • Principal residence rules in employment-related moves
    • Full disclosure required on all Forms
    • Buyer or seller may apply
    • All parties need ITINS for Withholding Certificate Application to be processed
    • IRS “bounces” incomplete applications
  • 17. Corporate Ownership
    • FIRPTA imposes U.S. tax on gains from the disposition of USRPIs by foreign corporations also
    • A foreign corporation that distributes a USRPI must pay a tax equal to 35% of the gain it recognizes on the distribution to its shareholders
    • This tax does not apply to 80% corporate owners if the foreign corporation is liquidated. It also does not apply generally in certain non-recognition transactions (e.g., a merger) if the acquired interest is also a USRPI
    • The normal withholding rules apply to dividend distributions of property to shareholders, i.e., 30% or a lesser treaty rate for dividends attributable to US source income, provided 25% of the corporation’s income is US source.
  • 18. Corporate Ownership
    • Additional issues if the US corporation is a U.S. Real Property Holding Company (USRPHC)
    • If a corporation qualifies as a U.S. real property holding corporation on any applicable determination date after June 18, 1980, any interest in it shall be treated as a U.S. real property interest for the shorter of the period of five years from that date or the period of ownership
    • A domestic corporation is a USRPHC if the fair market value of its USRPIs is equal to or greater than 50 percent of the fair market value of the corporation’s worldwide real property interests and all other assets used in a trade or business
    • Exceptions apply where the corporation sold all of its USRPIs, and another applicable to 5 percent-or-less owners of publicly traded USRPHCs  
  • 19. Foreign Nationals – Real Estate Rentals
  • 20. Nonresidents- Rental Income
    • If a USRPI interest is used by a foreign person or entity for the production of income, IRC section 871 imposes a 30 percent tax rate (or Tax Treaty rate if lower)
    • The income is to be treated as, “income not effectively connected with a U.S. trade or business” (Non-ECI)
    • Mechanism is used to assure the IRS receives tax due at source since NRAs with just non-ECI generally not required to file US tax returns
    • Nonresidents must file Form1040NR nonresident income tax return on a timely basis
  • 21. Nonresidents- Rental Income
    • The foreign person or entity can make an Election under IRC section 871(d) to treat the real property income as income effectively connected with a U.S. trade or business (ECI)
    • This election allows deductions and subjects net amount to tax at graduated tax rates. NRA must file a US tax return
    • In addition to the election, the foreign person needs to file W-8ECI with the payor of the income to identify it as ECI to relieve withholding obligation
  • 22. Estate Tax Issues
  • 23. Nonresidents – Estate Planning Issues
    • U.S domestic estate tax exemptions DO NOT APPLY to U.S. nonresidents
    • Definition of non-residence for estate and gift tax purposes differs from that for income tax
    • Notion of “domicile” or “permanent home”
    • Estate tax nonresidents can have SIGNIFICANT estate tax exposure and require counsel
    • Real estate is a common trigger for this exposure
    • Non-immigrant visa holders must take counsel
    • Green-card holders may also be affected
  • 24. Nonresidents – Estate Planning Issues
    • US nonresidents for estate tax purposes are taxed on “US situs” assets only but exemption is ONLY $60,000!
    • Tax Treaties may help but require disclosure of worldwide assets
    • Life insurance, offshore structures may assist but require careful consideration – no silver bullet
    • U.S. citizens with non-U.S. citizen spouses may also have other problems passing assets to second spouse free of tax
    • Foreign purchasers of U.S. real estate should consider formation of U.S. will, revocable living trust arrangements
  • 25. Circular 230 Disclosure
    • Circular 230 Disclosure: Internal Revenue Service regulations provide that, for the purpose of avoiding certain penalties under the Internal Revenue Code, taxpayers may rely only on opinions of counsel that meet specific requirements set forth in the regulations, including a requirement that such opinions contain extensive factual and legal discussion and analysis. Any tax advice that may be contained herein does not constitute an opinion that meets the requirements of the regulations. Any such tax advice therefore cannot be used, and was not intended or written to be used, for the purpose of avoiding any federal tax penalties that the Internal Revenue Service may attempt to impose.
    • The information contained herein is general in nature and is not intended as a substitute for specific legal advice nor is it to be relied upon for individual circumstances.
  • 26. Questions
  • 27. Thank You!
  • 28. Contact
    • R. Scott Jones, Esq.
      • (914) 214 5579, [email_address]
      • Westchester & Manhattan
    • Web: www.goldsteinjones.com