Withholding of Tax on Dispositions of U.S. Real Property Interests

 

 

It’s no secret that foreign investors are being courted by U.S. real estate agents and other investment conduits with eye-popping deals to buy real property in the U.S. The combination of a weak U.S. dollar and low interest rates has led to a phenomenal rise in the purchase of a U.S. real property interest by foreign investors. Eventually, these real property interests will be sold; therefore, foreign investors (transferors) and buyers (transferees) need to know their U.S. tax obligations when a disposition occurs. This article, the sixth in a series relating to the international tax gap, explains the rules for proper withholding of tax on the dispositions of U.S. Real Property interest. It also clarifies who is obligated to conduct the required withholding of tax upon the foreign investor’s disposition of real property interests. General Rule The Foreign Investment in Real Property Tax Act (FIRPTA) requires a FIRPTA withholding tax of 10% of the amount realized on the disposition of all U.S. real property interests by a foreign person. A buyer of U.S. real property interest from a foreign investor is considered the (transferee) and also the withholding agent. The transferee must find out if the transferor is a foreign person. If the transferor is a foreign person and the transferee fails to withhold, the buyer may be held liable for the tax. The seller must report that sale of the real property interests by filing a U.S. Federal Tax Form 1040-NR or Form 1120-F. Obligation of the Buyer/Withholding Agent If you are a foreign person or firm and you sell or otherwise dispose of a U.S. real property interest, the buyer (or other transferee) becomes the withholding agent and may have to withhold income tax on the amount you receive for the property (including cash, the fair market value of other property, and any assumed liability). Corporations, partnerships, trusts, and estates also may have to withhold on certain U.S. real property interests they distribute to you. See Reporting and Paying Tax on U.S. Real Property Interests. Remittance of Withholding Tax The withholding agent must remit the withholding of tax to the IRS by the 20th day of the date of the transfer on Form 8288, U.S. Withholding Tax Return for Dispositions by Foreign Persons of U.S. Real Property Interests. The withholding agent must also attached to Form 8288 a Form 8288-A, Statement of Withholding on Dispositions by Foreign Persons of U.S. Real Property Interests, for each person for whom tax has been withheld. Definitions: U.S. Real Property Interest is any interest (other than solely as a creditor) in real property located in the United States or the Virgin Islands or certain domestic corporations. Disposition means transfer of U.S. real property interest for any purpose of the Internal Revenue Code. This includes but is not limited to, a sale, exchange, capital contribution, redemption, distribution or gift. Amount Realized includes cash paid, fair market value of other property transferred, and the outstanding amount of any liability assumed by the transferee. Withholding Agent is the buyer (transferee) and is responsible for withholding and remitting the withheld amount on Form 8288/8288-A. The withholding agent is subject to penalties, interest, and the amount of tax required to be withheld. Reduced Withholding of Tax The foreign person disposing of a U.S. real property interest may have the 10% withholding reduced if certain conditions are met and Form 8288-B, Application for Withholding Certificate for Dispositions by Foreign Persons of U.S. Real Property Interests, is timely filed and accepted by the IRS. See exceptions from FIRPTA withholding and Withholding Certificates (reductions in 10% withholding). Reduced withholding certificates  may be submitted under the following situations: The disposition of the U.S real property interest takes place under one of the non-recognition provisions of the Internal Revenue Code. When the transferor’s maximum tax liability on the disposition is less than the amount otherwise required to be withheld. The transferor or transferee wants to come under certain installment sale rules. The transferor or transferee enters into an agreement with the IRS by posting a type of security (letter of credit, bond, etc.). The transferor or transferee may enter into a 12 month agreement with the service to obtain a “blanket withholding certificate” for multiple properties. A nonstandard application may be submitted for unique situations that do not fit into the above categories. References and Links For more information on dispositions of U.S. real property interests, see Publication 519, U.S. Tax Guide for Aliens. Also refer to Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities, for detailed instructions on how to apply for a withholding certificate under each of the 6 situations above. Definitions of terms and procedures unique to FIRPTA Foreign Persons Involved in U.S. Real Estate

Stimulus surprise: 15 million may owe IRS

Treasury report estimates many may be getting paid more of the Making Work Pay credit than they should. Their refunds may be cut or they’ll have to cough up the overpaid amount.

By Jeanne Sahadi, CNNMoney.com senior writer
Last Updated: November 17, 2009: 9:45 AM ET

The recovery from the Great Recession has likely started. But many economists are worried about falling into another downturn. Here’s what has them concerned.

NEW YORK (CNNMoney.com) — Nothing with taxes is ever simple, even when you’re getting a tax break.

An estimated 15.4 million tax filers may be getting paid more of the Making Work Pay credit than they should, according to a report from a Treasury Department inspector general publicly released Monday.

And that means they either will get less of a refund than they expected, or will actually owe money to the IRS on their 2009 taxes.

The IRS said in a written response to the report that the agency believes far fewer people than the inspector general estimates would be affected, and that the majority who might be would see less of a refund but would not have an out-of-pocket tax liability come April 15.

The taxpayers most vulnerable are those in two-earner couples; those who have dependents who earn wages; single or married filers who have more than one job at the same time; and filers who get pension payments or have a job and receive Social Security benefits.

The Making Work Pay credit, created as part of the stimulus legislation enacted in February, is equal to 6.2% of earnings up to $400 per person (or up to $800 per couples who file jointly). The full credit is paid to people making $75,000 or less ($150,000 per couple per household). A partial credit would be paid to those making above those amounts but no more than $95,000 ($190,000 for couples per household).

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For most who qualify, the 2009 credit is being paid in advance incrementally through their paychecks. And it’s been automatic – meaning employers, based on what they know of a worker’s income and using IRS withholding tables, automatically reduce the amount of taxes withheld from a worker’s paycheck.

But an employer doesn’t know the income of the worker’s spouse or whether the worker is claiming a dependent who also is earning money, or whether the worker has income from other jobs.

So, for instance, two spouses might be receiving the full credit at their jobs when their joint income only qualifies them for a partial credit or none at all. Another scenario: A single person with more than one job might be receiving the full credit at each of his jobs, when in fact he’s only entitled to $400 total.

You get the picture.

Such taxpayers could have increased their withholding to account for the possibility that they might receive more of the credit than they should. Indeed, when the credit was first passed, the IRS put out statements and created a calculator to help taxpayers in such situations figure out how much tax they should have withheld. But that doesn’t mean that everyone did.

Those who have had too little tax withheld this year will either face a reduced refund or owe money to the IRS. The money primarily would be the amount of the credit overpaid to them. But a much smaller group might also owe a penalty if they were significantly under withheld.

“More than 1.2 million taxpayers included in these groups may be subject to: 1) paying back some or all of the Making Work Pay Credit and 2) being assessed the estimated tax penalty or an increased estimated tax penalty as a direct result of the Making Work Pay Credit,” the inspector general’s report said.

The good news is that the IRS is likely to waive penalties for filers who may have to pay an estimated tax penalty or who would see their estimated penalty increased as a result of the Making Work Pay credit, according to the report.

The inspector general’s report also recommended that the IRS embark on an expanded effort to publicize this issue more and specifically target the message to those tax filers most likely to be affected.

First Published: November 17, 2009: 3:55 AM ET