When you’re dealing with a Seller who is not a U.S. citizen and is considered by the government as a non-resident alien for purposes of United States income taxation, you can avoid escrow delays and minimize the Seller’s frustrations by knowing and understanding the basic process that all Foreign Sellers have to go through when selling property in the United States.
First of all, the U.S. government will get its taxes when a property is sold, no matter who the Seller is. While you should always advise your clients to consult with their CPA or tax consultant for specific information for their transaction, the following information should lay the groundwork to let you know how unique the Foreign Sellers process can be. Hopefully with this information, and advice from the Sellers CPA, Sellers can get everything in order ahead of time to keep the escrow process on a reasonable timeline.
Apply for a SSN or Tax ID Number
Begin by checking whether the foreign seller who is transferring U.S. real estate has a Social Security number and/or Tax ID number. If they don’t, start the selling process by submitting an application for IRS Individual Taxpayer Identification Number Form W-7. Married sellers need to submit one for each spouse. The application must be notarized and include a current, certified U.S. passport. The process of obtaining a Tax ID number will take at least seven to eight weeks and the Seller should seek the guidance of a Tax consultant or CPA for the proper forms and further assistance.
Early Submission Ensures Proper Tax Withholding
Any non-resident of the US who sells real estate in the US will have 10% federal withholding as well as 3 1/3% California withholding. If the sellers do not start the Tax ID application process early, it delay any refund and/or reduction due to them.
Request a Reduction of Withholding
If your sellers feel that the 10% withholding exceeds their capital gains, they can submit a Form 8288-B Application for Withholding Certificate for Disposition by Foreign Persons of US Real Estate Interests. This document will be provided by the Escrow holder and should be submitted to the IRS requesting Reduction of Withholding upon receipt of the document. This document needs to be approved early so the Escrow holder processing the sale has time to obtain approval to submit less than the 10% U.S. withholding. This process takes several weeks, as well.
In summary, it’s important to remember:
- It takes seven to eight weeks to submit IRS Individual Taxpayer Identification number Form W-7. Married sellers must submit one notarized application for each spouse with a current, certified U.S. passport.
- Any nonresident who sells U.S. real estate will have 10% federal withholding and 3 1/3% California withholding. Not having a Tax ID delays any tax refunds or reductions.
- The Seller might be able to reduce their withholding, but must allocate several weeks to be approved before submitting less than the 10% U.S. withholding.
For further information and forms, seller’s should consult their CPA or tax adviser and can visit:
- 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
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