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Tax & reporting for foreign investors in U.S. real estate: Part II

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FIRPTA Withholding and FinCen Reporting is covered in part two of our Tax and Reporting Requirements for Foreign Investors in U.S. Real Estate.

Vaster Capital is committed to providing informative content to assist our potential foreign investor audience. Nothing is more imperative, as a foreign national, than to understand the framework of taxation and legal issues surrounding their decision to purchase investment real estate in the U.S.

In order to provide a simple yet effective overview, we introduce to you a two-part series on Tax and Reporting Requirements for Foreign Investors in U.S. Real Estate, prepared by real estate attorneys Larrea & Ortega. Part one covered Estate Taxes, Income Taxes, and Gift Taxes.

Foreign Investors in U.S. Real Estate are Subject to U.S. Tax Laws and Reporting Requirements

Although there are many tax and disclosure considerations when investing in U.S. real estate as a foreigner, a few important categories will be discussed in this two-part series:

  • FIRPTA Withholding

  • FinCen Reporting

FIRPTA Withholding

A Foreign Person and/or Entity Must Pay a withholding of 15% of Sales Price of Real Estate to IRS.

Foreign Person

FIRPTA must be remitted when a foreign person sells real estate.  It may be a foreign person or a foreign company.  An LLC owned by a single member, whether a foreign person or a foreign company, can still be subject to FIRPTA if the entity is a “disregarded entity” pursuant to IRS regulations.

Sale of Real Estate

When a foreign person or entity sells Real Estate, the buyer of the real estate is required to withhold from the sales price the funds required to be sent to the IRS and remit them to the IRS. 

Remittance of 15% of purchase price to IRS

This is the amount for any sales not exempt (below), except that the remittance drops to 10% under certain exemptions. 

Exemption

A property is exempt from FIRPTA withholding if the sales price is $300,000 or below and the buyer certifies in an affidavit that the property will be used by the buyer for his or her residence for at least the minimum amount of time required by IRS regulations.

Withholding Certificate

A Seller can request cooperation from the buyer in order to escrow the FIRPTA proceeds at closing, provided the Seller files a withholding certificate with the IRS prior to Closing.  The withholding certificate should be prepared by the Seller’s tax advisor.  In such cases, the closing agent will retain the 15% FIRPTA proceeds, but not remit them to the IRS at Closing.  Rather such funds will be held in escrow pending IRS’s response to the application for the reduced withholding filed by Seller.  Typically, the time frame for an IRS response is 90 days. Since there can be severe penalties for the closing agent involved if the deadlines are not met, it is highly recommended that you consult a lawyer prior to entering into a purchase and sale agreement in order to ensure cooperation from all parties involved.

Notice of Non-Recognition

Any transfers from a foreign person or foreign entity that have US RPI (United States Real Property Interest) require FIRPTA or may only need a Notice of Non-Recognition.  It is important to consult with your tax advisor to determine which applies in order to avoid costly penalties.

FinCen Reporting

What is FinCen

Fincen is the Financial Crimes Enforcement Network of the United States Department of the Treasury.  Purchases of U.S. real estate may be disclosed to FinCen.

When it applies

FinCen periodically changes the transactions that are subject to reporting requirements based on geographic region and price range, and those parameters are not permitted to be made public.  When FINCEN applies to a particular transaction, the beneficial owners must be disclosed to FinCen.

What is disclosed

Federal law requires the closing agents to collect certain additional information regarding the purchase of real property.  U.S. Code Title 31, Section 5326 authorizes the U.S. Department of the Treasury to collect certain information about certain transactions in specified geographic areas in order to carry out the purposes or prevent evasions of the Bank Secrecy Act.  The statute, as implemented by the Treasury orders, also prohibits anyone from disclosing the specific terms of the Geographic Targeting Orders.

Part I of our tax and reporting guide covered Estate Taxes, Gift Taxes, and Income Taxes.

 

NOTE: THIS BLOG IS NOT INTENDED TO GIVE ANY TAX ADVICE, BUT RATHER TO HIGHLIGHT THE MAJOR AND EXPENSIVE PITFALLS OF FAILURE TO TAX PLAN AS A FOREIGN INVESTOR IN REAL ESTATE.  ANY FOREIGN INVESTOR IN REAL ESTATE SHOULD CONSULT WITH AN EXPERIENCED TAX ACCOUNTANT AND/OR TAX ATTORNEY TO PROPERLY STRUCTURE THEIR TRANSACTION TO PROPERLY COMPLY WITH U.S. TAX LAW AND MINIMIZE TAX LIABILITIES.

IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the U.S. Internal Revenue Service, we inform you that any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of (1) avoiding tax-related penalties under the U.S. Internal Revenue Code or (2) promoting, marketing or recommending to another party any tax-related matters addressed herein.


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