Foreign Nationals - Immigration, visas, and taxation general guidelines

Foreign National Real EstateTaxation

GUIDELINES FOR FOREIGN SELLERS

APPLYING FOR RELIEF FROM

THE 10% WITHHOLDING

January 16, 2007

Thomas C. Roberge & Company

St. Petersburg and Sarasota

Telephone: (727) 822-9393

Contact: Troberge@RobergeCo.com

The start of the New Year marks the start of the selling season. With that, we thought it would be a good idea to review some of the points you should be aware of when handling sales for foreign investors who do not want to wait until well into 2008 to receive a refund for part or all of their 10% IRS withholding tax.

A non-U.S. seller can apply for relief from the 10% withholding when the actual tax is less than 10% of the gross sales price. The benefit to the seller in applying for relief is that it can get part or all of the 10% to him or her in the shortest amount of time. We are already seeing an increase in the number of people applying for relief from the 10% withholding in 2007 because of current market conditions.

The application must be filed between the time the sales contract is signed and the date of the closing. If the application is filed after the closing date (even by one day), the entire 10% must be remitted to the IRS and the seller must wait until the following year to file an income tax return for a refund.

When the application is timely filed, the 10% is held in escrow until the IRS processes the application and grants relief. At such time part or all of the escrowed funds are remitted to the seller.

The sellers and buyers must have U.S. tax identification numbers; otherwise, the IRS will not accept and process the application. If either the buyer or seller does not have one of these numbers, our firm is an Acceptance Agent for the IRS and has the ability to obtain these numbers.

Each year our firm processes numerous applications for relief from the 10% withholding for non-U.S. sellers. The rules in this area are detailed and specialized, and should only be handled by someone experienced in dealing with international tax matters before the IRS.

Internal Revenue Service Circular 230 Disclosure – You are hereby advised that any tax advice contained in this newsletter is not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or to support the marketing of any tax transactions or matters addressed herein.

HOW THE $250,000/$500,000 EXCLUSION OF GAIN

ON THE SALE OF A PRINCIPAL RESIDENCE CAN APPLY

ON THE SALE OF U.S. REAL ESTATE

BY A NONRESIDENT ALIEN

December 7, 2007

Thomas C. Roberge & Company

St. Petersburg and Sarasota

Telephone: (727) 822-9393

Contact: Info@RobergeCo.com

There is a U.S. tax rule that allows an individual to exclude from tax up to $250,000 of gain ($500,000 for a husband and wife meeting certain conditions) from the sale of a home owned and used by that individual as a “principal residence” for at least two of the five years immediately prior to the sale. “Principal residence” is a technical term created by the U.S. government of course.

This rule may (at first impression) seem to conflict with the 10% withholding requirement when a nonresident alien sells U.S. real estate. That rule requires that 10% of the total sale price be withheld at closing and paid within 20 days to the IRS on behalf of the foreign seller. The seller either applies for relief if the tax is less than that amount or files an income tax return for a refund to claim back the excess withholding.

These rules do conflict – but here is the fact pattern that occurs where the $250,000/$500,000 exclusion of gain exception takes over and overrides the 10% FIRPTA withholding rule. We have dealt with several of our foreign national clients who have moved here on certain U.S. residency visas and lived here for many years. For various reasons they have moved back abroad and abandoned their U.S. residency visas so that, in effect, they have reverted back to nonresident alien status from resident alien status for U.S. income tax purposes. Many of these individuals did not sell their former principal residences until they moved back abroad and became nonresident aliens again.

So what! It does not matter that they were nonresident aliens when they sold their former U.S. principal residence. All that matters is that they lived in the property as their principal residence for two of the five years up to the date of sale. They are still subject to the 10% FIRPTA withholding, but can apply for relief claiming the benefits of the principal residence exclusion.

Here is an example of how the rule works. Mary and John Stanton are UK citizens. Mary was transferred to Orlando, Florida on a temporary work visa on July 8, 2003 to become an executive for a company here. Mary and John purchased a home in the Orlando area on August 28, 2003. Mary and her family lived here until August 2, 2007, at which time she moved back to the U.K. and surrendered her temporary work visa and reverted back to nonresident alien status. Mary and her husband filed joint U.S. income tax returns while they lived here. She listed her Orlando residence for sale on May 17, 2007, but because of poor market conditions was unable to sell the home until March 5, 2008.

Mary and John were nonresident aliens when they sold the Orlando property. However, because the home was their principal residence for two out of the five years up to the date of sale, they qualify for the exclusion of gain on the sale of a principal residence. Mary and John obtained an exemption from the 10% FIRPTA withholding by filing an application for relief.

We have successfully obtained numerous withholding certificates using strategies we have developed for handling these situations. Feel free to contact us at (727) 822-9393 or (941) 952-5848 if you want more information how these generous rules could apply to you or your client.

Thomas C. Roberge & Company

St. Petersburg and Sarasota

Telephone: (727) 822-9393

Telephone (941) 952-5848

Contact: Info@RobergeCo.com

With the tourist season upon us we are seeing that numerous overseas investors are obtaining sales contracts on their Florida vacation property. With that in mind, we thought it would be a good idea to review some of the points you should be aware of when handling sales for foreign investors who do not want to wait well into 2009 to receive a refund for part or all of their 10% IRS “FIRPTA” withholding tax.

A non-U.S. seller can apply for relief from the 10% withholding when the actual tax is less than 10% of the gross sales price. This is commonly referred to as a “Withholding Certificate”. The benefit in applying for relief is that the seller can get part or all of the 10% released to him or her in the shortest amount of time. We are already seeing an increase in the number of people applying for relief from the 10% withholding in 2008 because of current market conditions.

The application must be filed between the time the sales contract is signed and the date of the closing. If the application is filed after the closing date (even by one day), the entire 10% must be remitted to the IRS and the seller must generally wait until the following year to file an income tax return for a refund.

When the application is timely filed, the 10% is held in escrow by the closing agent until the IRS processes the application and grants relief. At such time part or all of the escrowed funds are remitted to the seller.

Each year we process numerous applications for relief from the 10% withholding for non-U.S. sellers. The rules in this area are detailed and specialized, and should only be handled by someone experienced in dealing with international tax matters before the IRS.

Feel free to contact us at (727) 822-9393 or (941) 952-5848 to discuss how we can help you.

Thomas C. Roberge & Company

St. Petersburg and Sarasota

Telephone: (727) 822-9393

Contact: Info@RobergeCo.com

We are receiving numerous questions concering the tax treatment of quitclaims of U.S. real estate by foreign corporations to their foreign shareholders. This Newletter will explain the tax treatment of these transactions and also the IRS treatment of real estate option contracts involving foreign persons.

An IRS Release holds that quitclaims by foreign corporations to their foreign shareholders and subsequent sale by the foreign individual shareholder is taxable as a sale by the corporation at its current fair market value, even though the final sale is made by the foreign individual. The quitclaim is subject to the FIRPTA withholding to the corporation and is taxable to the corporation at the higher corporate rates. The Release goes on to hold that the quitclaim by the foreign corporation is subject to a 35% withholding tax – that’s right – 35%! If the 35% is not withheld the IRS can also assess penalties and interest.

The IRS Release goes on to say that the disposition of a real estate option contract by a foreign person is also subject to the 10% FIRPTA withholding and the filing of an income tax return by that foreign person.

We have considerable experience in minimizing the tax burden associated with these types of transactions. Contact us at (727) 822-9393 or (941) 952-5848 if you have questions concerning the application or planning for these rules.

The following is the text of the IRS release:

Withholding Required on Certain U.S. Real Property Transactions Involving Foreign Persons, IRS Warns

FS-2005-16, September 2005

The IRS today reminds all real estate and tax professionals of the withholding tax and the filing obligations with respect to two transactions in which a foreign person disposes of a U.S. real property interest. The transactions involve the disposition by a foreign person of an option or contract to acquire a U.S. real property interest, and the disposition by a foreign corporation of a U.S. real property interest by way of a transfer to a shareholder.

Disposition of an Option or Contract to Acquire a United States Real Property Interest

Under U.S. tax law, a foreign person that sells or exchanges a U.S. real property interest must report the gain on a U.S. tax return, and the buyer of the U.S. real property interest must withhold and pay to the IRS 10 percent of the gross amount paid to the foreign person. A U.S. real property interest includes options or contracts to acquire land or land improvements and leaseholds of land or land improvements. The disposition of such an option or contract by a foreign seller is reportable on the foreign seller's U.S. tax return and is subject to a 10 percent withholding tax payable by the buyer to the IRS. Under U.S. tax law, the buyer must determine if the seller is a foreign person. If the seller is a foreign person and the buyer fails to withhold, the buyer can be held liable for the withholding tax.

The IRS has become aware of instances in which foreign persons have acquired options or entered into contracts to purchase U.S. real property interests and sold the options or assigned the contracts before such instruments are exercised or executed and title to the underlying property is taken. Buyers of the options or contracts are failing to withhold and remit to the IRS the required 10 percent from the proceeds of the sale.

Transfer to a Shareholder

The IRS is also aware of potentially abusive transactions where a foreign corporation arranges a sale of its U.S. real property interest to a buyer and then transfers its U.S. real property interest to its foreign individual shareholder. The corporation often uses a quitclaim deed for the transfer, which conveys to the shareholder only the corporation's interest in the property and does not warrant good title, but other deed transfers may present similar issues. The foreign shareholder then sells the U.S. real property interest to the buyer. The foreign shareholder takes the position that, because he or she, rather than the corporation, is selling the property, some or all of the gain inherent in the foreign corporation's U.S. real property interest is subject to a maximum capital gains rate of 15 percent. That is, the foreign shareholder claims that the transfer of the U.S. real property interest by the foreign corporation to the shareholder does not result in a corporate level tax. If the foreign corporation had directly sold the U.S. real property interest, it could be subject to tax at a rate as high as 35 percent.

The shareholder's position is incorrect. Generally, the foreign corporation (and not the foreign individual shareholder) is taxed on all of the gain inherent in the U.S. real property interest. The transaction is treated as a taxable sale of the U.S. real property interest by the corporation, either because the corporation is making a distribution to the foreign shareholder of the U.S. real property interest (which would constitute a deemed sale of such interest at the corporate level) or because the corporation is viewed as selling the entire U.S. real property interest directly to the buyer. In cases where the foreign corporation is treated as making a distribution of the U.S. real property interest, the foreign corporation is also subject to a withholding tax of 35 percent on the gain in the property, unless it qualifies for reduced withholding (see Publication 515).

Taxpayers may find the following publication, forms, IRS guidance and regulations helpful:

Publication 515
Form 8288
Form 8288-A
Form 8288-B
Form W-7
Form SS-4
Form 1099-S
Form 1120F
Rev. Proc. 2000-35
IRC § 1445(a) and (e)
Treasury Regulation § 1.1445-1(b)(3)

CONDOMINIUM ASSOCIATIONS RENTING UNITS

ON BEHALF OF THEIR FOREIGN OWNERS

ARE SUBJECT TO THE SAME RULES AND LIABILITIES

AS RENTAL AGENTS

February 14, 2007

Thomas C. Roberge & Company

St. Petersburg and Sarasota

Telephone: (727) 822-9393

Contact: Troberge@RobergeCo.com

There are many condominium associations in Florida that handle rentals on behalf of their owners. The owners are U.S. or foreign.

The condominium associations that handle these rentals are subject to the same reporting and compliance rules as rental agents. These rules include collecting and payment of state and county sales taxes, filing information reports (Forms 1099, 1096, 1042 and 1042-S) annually with the Internal Revenue Service and complying with the special rules that apply to foreign owners who rent their Florida condominiums through their associations.

This article discusses the rules that apply to condominium associations that handle rentals for their foreign owner/members. Failure to comply with these rules can subject the association membership to taxes, penalties and interest by the IRS. Also, associations (and their members) that do not comply with the state and local sales tax collecting and remittance rules are also subject to taxes, penalties and interest.

A rental agent (e.g. an association management office) who collects rents on behalf of a foreign unit owner is required to withhold 30% of the gross rents they collect, and remit the withholding to the Internal Revenue Service (“IRS”) unless the foreign owner furnishes the association management a fully executed IRS Form W-8ECI, Certificate of Foreign Person’s Claim That Income Is Effectively Connected With the Conduct of a Trade or Business in the United States. If the rental agent does not receive a fully executed Form W-8ECI, then he or she, the association and its membership are liable for this 30% tax, plus penalties and interest. If the association is unable to recover this from the foreign property owner, then the association will have to pay these amounts from its assets. If the association has insufficient assets then it will have to levy a special assessment against it's members to pay the IRS. Otherwise, the IRS can file a tax lien to protect its interest.

A fully completed Form W-8ECI must include a valid U.S. social security or tax identification number for the foreign owner to be effective. If it does not receive this number, then the association rental agent must collect the 30% tax and remit it to the IRS.

Furthermore, the association is subject to annual information reporting to the IRS for rents they collect on behalf of their foreign owners. These forms include Forms 1042 and 1042-S.

Our firm specializes in U.S. international tax and compliance issues. Feel free to contact us at (727) 822-9393 or (941) 952-5848 if you have questions or need assistance.

SALES OF U.S. REAL ESTATE

INVOLVING A FOREIGN DECEDENT

ON TITLE AT THE TIME OF DEATH

March 3, 2008

By Susan Inez Poskus, CPA

Thomas C. Roberge & Company

St. Petersburg and Sarasota

Telephone: (727) 822-9393

Contact: Info@RobergeCo.com

The Internal Revenue Service has special, stringent rules for sales of U.S. real estate if a foreign person was on the title to the property at the time of his or her death. Basically, clear title cannot be conveyed nor can the heirs receive the sales proceeds until certain statutory procedures are complied with. Failure to adhere to these rules creates personal liability to anyone involved with the transaction who has receipt or control over the sale proceeds. This includes the buyer, the realtor taking the deposit on the contract, the title insurance company and the closing agent completing the sale and disbursing the funds.

These rules also apply where a surviving spouse is currently selling Florida real estate, which he or she jointly owned with a deceased spouse at the time of that spouse’s death – even if the spouse passed away several years before. There is a common misconception by Florida attorneys that property jointly owned by husband and wife as tenants by the entirety automatically passes to the surviving spouse. While this may be true under Florida law, it does not relieve the federal tax lien on the property under the Internal Revenue Code.

The surviving spouse is now (even at this date many years later) still personally liable for the Federal estate tax if it was not paid when due. The buyers, realtors and closing agent are also potentially liable (to the extent they have cash under their control even for a moment) for any unpaid estate tax (plus interest and penalties) as a “Statutory Executor” if a Transfer Certificate is not obtained from the Internal Revenue Service before closing the sale. This group is liable as a Statutory Executor since they, at various times, control the funds.

Remember, a foreign decedent only receives a $60,000 exemption from the federal estate tax compared to a $2 million exemption for a U.S. decedent!

Assume that you have John and Mary Smith, Canadian citizens and residents. They purchased a Florida condominium on February 2, 1995 as tenants by the entirety. John passed away on June 16, 2005. A federal estate tax return was never filed. Though title passes to the surviving spouse under Florida law, the federal estate tax lien still exists and is not removed until a Transfer Certificate is issued, a federal estate tax return is filed, and the IRS issues a Closing Letter for the estate.

Let’s further assume that in July 2008 Mary plans to sell the condominium. You must obtain a Transfer Certificate before you can close the sale in July 2008. Failure to obtain the requisite certificates can result in you being held liable for any tax shortfall by the IRS.

We have the experience and expertise in obtaining tax certificates from the IRS so the sale can proceed timely and in an orderly manner, so the real estate professionals can receive their fees at closing with no fear of IRS involvement and the heirs can receive what is rightfully theirs.

It is in everyone’s best interests to contact us at (727) 822-9393 or (941) 952-5848 as early as possible once you are aware that this type of situation exists.

1031 EXCHANGES AND FOREIGN INVESTORS

UNIQUE CONSIDERATIONS

March 5, 2007

Thomas C. Roberge & Company

St. Petersburg and Sarasota

Telephone: (727) 822-9393

Contact: Troberge@RobergeCo.com

Each week we receive numerous questions from real estate professionals regarding the ability of foreign investors to transact Section 1031 exchanges. These types of transactions are also commonly referred to as “Starker”, tax deferred or tax free exchanges of real estate.

The short answer is that a foreign investor can structure a “1031” transaction as long as they meet the normal, statutory requirements for such an exchange. However, “1031” exchanges may not always be as desirable for foreigners as they are for domestic investors because of special U.S. tax rules and the home country tax consequences of these transactions.

The first obstacle for a “1031” transaction for a foreign investor is that the exchange is subject to the 10% FIRPTA withholding and almost always is not eligible for a “Notice of Nonrecognition” for purposes of avoiding FIRPTA. The IRS will issue a withholding certificate for a like-kind exchange, but the 10% withholding will have to stay in the closing agent’s escrow account for the four to six months it takes for the IRS to process the withholding certificate application. This means that the seller may have to raise additional capital to complete the exchange.

The second roadblock is that many countries do not respect the deferral aspect of a “1031 exchange” and will tax the gain currently even though U.S. tax law defers the tax. This means that the entire capital gains tax can be payable in the seller’s home country with no current offset for U.S. taxes in the year of the exchange. This often creates serious long-term tax problems in the seller’s home country. The potential long-term tax problems can be quite severe and are beyond the scope of this article. In summary, your foreign investor should definitely obtain home country tax advice before consummating a “1031” exchange. Our firm has extensive experience in working with foreign tax professionals in evaluating the desirability of these transactions.

The last issue - especially for foreign investors – is that the long-term tax rate on capital gains presently is only 15%. If a foreign investor consummates a “1031 exchange”, the tax rate on the deferred gain will likely be the tax rate in effect in a future year when the deferred gain is eventually taxed. We can remember when the long-term tax rate on capital gains was 28% and 35%. This opens the possibility for a deferred “1031” gain to be taxed at a higher rate in the future than at the 15% rate today. Let’s face it – 15% is pretty cheap compared to most countries. Your foreign investor may feel good about being able to keep 85% of the profit today compared to only 65% or less in the future if Congress decides to raise taxes to cover budget deficits, bail out social security, etc.

Let’s realize it – the U.S. is a great place to invest and will continue to be. The tax rates are structured favorably to accomplish this. The adjustment presently going on in the real estate market is offering opportunities to buyers and sellers like we have not seen for many years. The “key” to success in this type of market is patience and getting tax advice before the transaction is consumated.

RENEWED IMPORTANCE FOR

FOREIGN SELLERS OBTAINING WITHHOLDING CERTIFICATES

ON REAL ESTATE SALES

June 15, 2007

Thomas C. Roberge & Company

St. Petersburg and Sarasota

Telephone: (727) 822-9393

Contact: TRoberge@RobergeCo.com

When a non-U.S. person sells U.S. real estate, the U.S. tax authorities (“IRS”) require that 10% of the gross sales price be withheld at closing and paid as an estimated tax payment on behalf of the foreign seller. If the actual tax liabiltiy is less the buyer can obtain a refund by following certain procedures.

There are three ways for dealing with the 10% withholding:

Having the 10% withheld and filing an income tax return for a refund in the year following the sale.
Applying to the IRS for relief from the 10% withholding. This procedure is commonly referred to as a “Withholding Certificate”. The seller must still file an income tax return for the year of sale.
For sales of $300,000 or less, the buyer can sign a statement avoiding the 10% if they meet certain conditions. Most buyers will not sign this statement when they see the risks involved.

Applying for relief from the 10% withholding (the withholding certificate) has the advantage of getting all or a part of the 10% to the seller in the shortest amount of time if the actual tax is less than 10% of the sales price. The application must be filed between the time the sales contract is signed and the closing date. If the application is filed after the closing date (even by one day), the entire 10% msut be remitted to the IRS and the seller must generally wait until the following year to file an income tax return for a refund.

When the withholding certificate application is timely filed the 10% remains in escrow with the closing agent until the application is approved. At that time the reduced tax is remitted to the IRS and the balance of the 10% is sent to the seller. This procedure has the added advantage of keeping as much of the money from the IRS as possible.

The alternative is for the 10% to be remitted to the IRS with the seller filing an income tax return for a refund of the overwithholding. The PROBLEM with this strategy is that the IRS has misposted many of these 10% payments in 2006 and recently resulting in delays and added costs for those trying to get their overwithholding refunded.

In 2006 the IRS moved its services associated with handling the 10% withholding from the Philadelphia Service Center to two other regional processing centers. This change has resulted in many of these 10% payments not being applied to foreign sellers tax accounts with the IRS. This is causing significant delays in foreign sellers obtaining their rightful refunds.

Until this problem is resolved the best solution is for a foreign seller to apply for relief from the 10% (“withholding certificate”) before the closing date. This will ensure that all or part of the 10% goes to the seller in the shortest amount of time.

Our firm represents many foreign sellers and processes numerous withholding certificate applications each year. We know the people in the IRS who review these applications and have the expertise to see that the 10% withholding is free up in the shortest amount of time.

Call us at (941) 952-5848 or (727) 822-9393 for us to review your situation to see what we can do for you.

TAX PLANNING FOR

MORTGAGE INTEREST DEDUCTIONS

ON U.S. REAL ESTATE OWNED BY FOREIGN PERSONS

May 15, 2007

Thomas C. Roberge & Company

St. Petersburg and Sarasota

Telephone: (727) 822-9393

Contact: TRoberge@RobergeCo.com

The weakening U.S. dollar has increased the demand for U.S. real estate by foreign nationals. Many of these investors are borrowing against the equity in their foreign residences to increase the size of their U.S. investments. Part of the reasoning process in borrowing overseas is that many countries have lending rates that are even lower than interest rates here. Also, with their home country currency being stronger, it takes less funds to borrow to acquire their investment in the U.S.

Many of these foreign investors ask us if this mortgage interest is deductible against their U.S. real estate investments to reduce any U.S. income tax payable.

The answer is two-fold. First, the property has to be rental property and they have to file a U.S. nonresident income tax return each year to report the rental income and expenses. In case you are not aware, our firm has a department that prepares and files over 1,200 income tax returns each year for foreign nationals with U.S. rental properties.

Secondly, the mortgage has to be secured by the U.S. real estate for the interest expense to be deductible against the rental income. We have assisted many of our clients in taking the necessary steps to secure their foreign mortgages against their U.S. real estate to preserve this valuable tax write-off.

Please contact us at (727) 822-9393 or (941) 952-5848 if you have questions.

SOCIAL SECURITY NUMBERS, TAX ID NUMBERS

AND THE 10% FIRPTA WITHHOLDING

May 16, 2007

Thomas C. Roberge & Company

St. Petersburg and Sarasota

Telephone: (727) 822-9393

Contact: TRoberge@RobergeCo.com

This newsletter discusses the 10% withholding issue for foreign sellers who hold social security numbers or Individual Taxpayer Identification Numbers (commonly referred to as ITIN’s or tax ID numbers).

Each week we receive several phone calls asking if the 10% FIRPTA withholding is applicable if the seller holds a social security number or ITIN. We have addressed this topic before and need to keep re-emphasizing it to our readers since many of you do not deal with foreign related transactions on a regular basis.

The 10% withholding applies to a foreign seller regardless of the fact that they hold a valid U.S. social security or tax ID number. The law only looks at one fact – you have a foreign seller disposing of U.S. real estate. The IRS wants the 10% withheld as an estimated tax payment so the foreign seller files a U.S. income tax return and pays his or her share of the tax liability on the sale. If the tax is less the seller will obtain a refund if they follow certain procedures. There are several relief measures available too. Call us for information.

Most of the time it is obvious as to whether the seller is a U.S. or foreign person. However, at times this is not always clear. For example, the seller may be a non-U.S. citizen and hold a work or other visa that allows them to temporarily reside in the U.S. They may or may not be a “U.S. person” for purposes of avoiding the 10% withholding tax – depending on the facts in their situation. Call us when you are faced with this situation so we can walk you through the facts to arrive at the correct answer. Believe it or not, there are over 50 pages of compressed print in the IRS final regulations defining a U.S. and foreign person. These rules are not always logical. However, we have extensive experience in working with these rules and usually can arrive at the correct answer and treatment with only a few questions.

It is easy to get upset when faced with the 10%. Many will try and rationalize their way around the law with this tax ID number argument. However, just remember that the law is only looking at one fact – you have a foreign seller disposing of U.S. real estate and the IRS wants to ensure that the foreign seller pays the same tax that a U.S. person would pay in similar circumstances. Also, there are no tax treaties with any country that avoid the 10% withholding requirement.

Please contact us at (727) 822-9393 or (941) 952-5848 if you have questions.

AVOIDING THE 30% WITHHOLDING TAX

ON FOREIGN LANDLORDS RENTAL INCOME

June 25, 2007

Thomas C. Roberge & Company

St. Petersburg and Sarasota

Telephone: (941) 952-5848

Telephone: (727) 822-9393

Contact: TRoberge@RobergeCo.com

U.S. tax law requires any person collecting rents on behalf of a foreign property owner to withhold and remit to the IRS 30% of the gross rents they receive on behalf of that foreign property owner unless they have received certain documentation from the owner. Failure to adhere to these rules can subject the rental agent, or his or her company, to that 30% tax being assessed against them.

The IRS has a form, which, if properly completed, completely avoids the 30% withholding tax on rental income collected on behalf of foreign landlords. Form W-8ECI, Certificate of Foreign Person’s Claim for Exemption From Withholding on Income Effectively Connected With the Conduct of a Trade or Business in the United States, accomplishes this task.

The foreign owner must fully complete the form to obtain this exemption from this 30% withholding tax. The owner must provide his or her U.S. social security or tax identification number on line 6 of the form. Until this number is provided the form is not valid and 30% withholding and remittance to the IRS is required. There are procedures we can employ to obtain a refund of this withholding when we file the foreign property owner’s U.S. income tax return the following year.

Form W-8ECI remains in effect for a period starting on the date the form is fully executed (including the providing of a U.S. social security or tax ID number) and ending on the last day of the third succeeding calendar year, unless a change in circumstances makes any information on the form incorrect. For example, a Form W-8ECI executed and delivered to the rental agent on July 6, 2007. It remains valid through December 31, 2010. Upon expiration of the three-year period, a new Form W-8ECI must be obtained.

Our firm, as a licensed IRS Acceptance Agent with the IRS, can obtain tax ID numbers for your foreign clients and also provide you with completed exemption forms if we represent them. Feel free to contact us at (941) 952-5848 or (727) 822-9393 if you have questions.

HIGH MORTGAGE BALANCE

COUPLED WITH 10% FIRTPA WITHHOLDING

CAN CREATE CASH SHORTFALL FOR FOREIGN SELLERS

July 11, 2007

Thomas C. Roberge & Company

St. Petersburg and Sarasota

Telephone: (727) 822-9393

Contact: TRoberge@RobergeCo.com

A potentially difficult situation for foreign sellers is coming to the forefront with U.S. real estate sales. This situation has been caused in part by the overzealous lending practices by certain financial institutions. What can happen is that a foreign seller could have to bring money to the closing table for a sale to be closed.

The overheated real estate market that created tremendous appreciation in real estate prices between 2000 and 2004 caused many unscrupulous lenders to persuade property owners to refinance on their existing mortgages based on this appreciation. To further aggravate this situation these lenders offered products such as reverse amortization and other financially unsound mortgage products to their unsuspecting consumers. One only has to look at the financial mess brewing with Bear Stearns and others involved in the sub-prime mortgage market.

The present adjustment going on in the real estate market coupled with the “time bomb” these lenders have created, has resulted in a potentially dangerous situation.

Consider the following. Let’s say that Jane Smith from foreign country X sells her Florida condominium for $1 million. Jane refinanced on her mortgage two years ago when the lender told her the property had an appraised value of $1.2 million! She is presently carrying a mortgage of $900,000 on the property and the sale closing costs (realtor’s commissions, documentary stamps, etc.) are $75,000.

Here are the results:

Sales price
$
1,000,000

Mortgage payoff

900,000

Closing costs

75,000

10% FIRPTA withholding

100,000

1,075,000

Cash shortfall
$
(75,000)

In other words, the seller is going to have to bring $75,000 to the closing table just to complete the sale. It is in everyone’s best interest to identify this problem early in the listing period so the seller can better deal with this situation.

There are strategies our firm uses to effectively deal with this problem and handle the associated FIRPTA issues on an expedited basis. We have assisted several foreign sellers and their realtors recently that have been faced with similar circumstances. Contact us at (941) 952-5848 or (727) 822-9393 if you would like to discuss your situation and see how we can assist you.

Foreign National Real EstateTaxation

Withholding Required on Certain U.S. Real Property Transactions Involving Foreign Persons, IRS Warns