To Withhold, or Not to Withhold
The Florida real estate market continues to be a popular place for foreign investors to purchase real estate. In 2018, the National Association of Realtors (NAR) revealed that 19 percent of international investments in real estate within the United States were in Florida, the highest among all states, followed by California and Texas. According to the NAR’s study, foreign buyers and recent immigrants purchased approximately $121 billion of residential property between April 2017 and March 2018. These foreign buyers will eventually become foreign sellers, and these foreign sellers may then be subject to the Foreign Investment in Real Property Tax Act of 1980.
foreign nationals invest in real estate
I have gotten many phone calls recently asking for advice on what to watch for when foreign nationals invest in real estate here in the Sunshine State. It is safe to say that in our economy Real Estate Agents have to learn what to expect and require from foreigners. First off, there would be no sale, of course, if there wasn’t the initial purchase of the real estate. The critical issues come when they sell their investment but it really all starts when they buy.
no additional paperwork
A foreigner does not have to have a green card, permanent residence status or a Tax Identification Number (ITIN) in order to make the investment. The foreign buyer deposits the funds in escrow and that is that. The Escrow Officer happily takes the money in and there would be no special additional paperwork that would be required from this foreign buyer. Furthermore, the Settlement Agent does not report the funds or its source to the IRS. For a foreigner, although no ITIN is required at the time or purchase, I strongly recommend though that they check with a U.S. accountant whether they should apply for an ITIN number after the purchase is made, as the filing of income tax returns for their investment properties may be required at the year end.
Foreign Investment in Real Property Act (FIRPTA)
The point of selling the property is where the confusion and questions come in for the foreign seller. In order to complete the sale of the property, every seller, foreign or not, is required to complete and sign, under penalty of perjury (perjury – willfully making a false statement), the Foreign Investment in Real Property Act (FIRPTA) form.
This form states that the seller is not a ‘nonresident alien’, i.e., a foreign person. The foreign seller cannot sign this form, even if they already have a ITIN number, and must return it unsigned, which then becomes notification to the parties and the settlement agent that he is a foreigner.
liable for the tax and penalties
A settlement agent cannot police this; if this seller completes the FIRPTA form (under penalty of perjury) and hands it to the Settlement Agent, then he or she accepts it “as is” for the file. Buyers in the transaction need to be aware that the IRS designates the buyer as the Withholding Agent and therefore it is the buyer’s responsibility to do the tax withholding and send the amount to the IRS. As a matter of course the buyer will then instruct the Settlement Agent to do this withholding as he or she is more familiar with the process, but buyers must be aware that that if the FIRPTA withholding is not done, or not done correctly, the buyer may become liable for the tax and penalties.
This is a good reason why buyers and sellers must be sure that they are using a Settlement Agent who is knowledgeable and experienced in this law and who knows what needs to be done, what to expect, and what are possible solutions.
One of the most important things about this whole process is that the foreign seller needs to have their Individual Tax Identification Number (ITIN) in order to properly do the withholding. If the seller doesn’t have one, it can be obtained by submitting form W-7 to the IRS. This ITIN number is required by the time the escrow is being closed as it takes six to eight weeks to process, so immediate attention is required. This is why I mentioned that it is a good idea for the seller to try to obtain this ITIN when he became the owner of the property after the initial purchase was made. The seller should go to an accountant who is well versed in this area to apply for the ITIN. New regulations for the application of the ITIN require the foreign applicant to submit their original passport with the application, or they must get a “Certified” copy of it. A “Certified” copy can be obtained from special Certified Acceptance Agents at the IRS or at qualified CPA’s such as Allure International Tax Consulting who have completed form 13551 and have successfully passed a continuous certification training every two years.
In the next issue of the newsletter I will elaborate on issues of concern relating to married couples, how the requirements to withhold can be circumvented as well as the newest changes in calculating the amount of the withholding. I will also discuss why it is necessary for foreign buyers to discuss possible tax implications in case of a future inheritance of the property. So be sure, to sign up to oure newsletter!