Closing On Time with Foreign Sellers
We have all heard the saying: it’s a small world. And that is becoming more and more true as international buyers lay down roots around the world in the form of real estate. For this reason, as a buyer, you may very well encounter a situation where the seller of the home you are eyeing does not hold a U.S. passport. And while navigating a purchase with an international seller is not tricky, per se, there are some things you will want to know.
First up, our government. How do they view foreign sellers when it comes to taxation? In a situation like this, the U.S. government considers any seller who is a non-resident alien a foreign person, which means they have a different process to complete when they are attempting to sell. It is crucial that the buyer find out early on that you are dealing with an international seller to avoid escrow delays.
So, how exactly does a sale with an international seller work? Before we get into the nuts and bolts, so to speak, it is important that you have a Certified Public Accountant (CPA) or tax attorney by your side during this process. They are often a great source of information regarding an international transaction, and they can help you collaborate with escrow on navigating the withholding amounts required. Keep in mind the buyer is designated by law as the withholding agent.
One of the biggest differences when you are dealing with an international seller is how projected taxes are required to be withheld at a closing on the sale of real property. Below, we have outlined the necessary steps that include some very important tasks that need to be accomplished when you’re dealing with a foreign seller. Let’s take a closer look:
Is the seller able to sign the FIRPTA affidavit ?
This is ground zero when it comes to an international seller, and something you will want to find out early on in the process. Inquire about whether or not they have a social security number or tax ID number and whether they will be able to submit a non-foreign status affidavit to escrow. Notify escrow immediately so the appropriate instruction and forms may be incorporated into the transaction. Sellers without a tax identification number should hasten their W-7 application when listing property as the acquisition of a number can now take 2 months or longer. We recommend seeking the advise of a professional international tax advisor for this process.
Sellers: Don’t Wait to Submit for a Tax ID
We mentioned that this process can take a while, so it is imperative that the seller submits for a Tax ID as soon as you decide to sell. This helps to avoid delays with any refunds and/or reductions that they are due.. A non-resident who sells real estate in the U.S. is subject up to a 15% federal withholding and up to 3 ⅓% California withholding.
Sellers: Applying Reduction of Withholding
When the 15% federal withholding exceeds their capital gains, sellers may opt to apply for a reduction of the withholding amount. If this is the case, they are able to request a reduction of withholding by submitting Form 8288-B (Application for Withholding Certificate for Disposition by Foreign Persons of U.S. Real Estate Interests). This is another part of the process where timing is of the essence; this document should be approved early in the transaction to allow the Escrow holder time to obtain approval from the buyer, review the documents and draw and instruction to hold funds pending the IRS determination of the application.
We have put together a short list of valuable online resources below that will help you navigate a sale with an international seller. Here are some high points to keep in mind:
- Confirm with escrow on receipt of the FIRPTA affidavit or request an instruction for withholding.
- Sellers: Collaborate with escrow and seek the assistance of a foreign tax specialist for help with the Tax ID application and 8288-B. Turn times can be lengthy, as 7 weeks or longer.
- Non-residents selling U.S. real estate may be subject up to a 15% federal withholding and up to 3 ⅓% California withholding, based on sales price.
- Not having a Tax ID at close of escrow may delay any tax refunds or reductions when seller files a tax return,
- If the seller is interested in reducing their withholding, it is important to allow several weeks for Form 8288-B (Application for Withholding Certificate for Disposition by Foreign Persons of U.S. Real Estate Interests) to be processed and approved. IRS approval is required before they can submit less than the 15% U.S. withholding.
- IRS: http://www.irs.gov/pub/irs-pdf/p515.pdf
- Tax ID Number: http://www.irs.gov/businesses/small/international/article/0,,id=96696,00.html
- Withholding Reduction: http://www.irs.gov/pub/irs-pdf/f8288.pdf
Navigating a sale with an international seller may seem overwhelming, but our expert team of international escrow specialists are happy to assist you. Please contact us today for all of your escrow needs!