Of late, I have been getting calls from realtors, who are representing their Canadian (predominantly) clients sell their US rental properties here in the Phoenix/Scottsdale/Mesa/Chandler area. The real estate market is hot, properties have appreciated, and properties are selling for well above the listed price with Multiple Offers. It is understandable that clients want to cash in on this market.
The realtors call me for two reasons.
First, the Internal Revenue Service (IRS) requires that when a foreigner (non-US person) sells a US based property, a 15% of the gross sales price be withheld (under FIRPTA - Foreign Investment in Real Property Tax Act) and remitted to the IRS (by the buyer). This is because it is difficult for IRS to go after foreigners and get taxes from them after the sale due to jurisdictional issues when dealing with a person who has a different nationality. (On the contrary, IRS has a whole arsenal available to collect tax debt from US nationals such as wage garnishment, levying assets such as bank accounts or state tax refunds, and placing a Federal Tax Lien on their assets, to mention a few). Think about this - you bought a rental property for $450,000 a few years ago, and you sell it for $500,000 giving you a gain (capital gain) of $50,000. Under the FIRPTA rules, this is 15% x $500,000 = $75,000, well more than the gain on the property! If you filed an actual Federal Income Tax return, you pay only a portion of the gain as tax, approximately 15% of $50,000 = $7,500 in Tax [compared to $75,000 that IRS wants!]
Second, how does IRS track the $75,000 withholding it receives and credits to you and to you only? Since Foreign nationals do not generally have a US Social Security Number (SSN), IRS requires them to apply for a US Individual Tax Identification Number (ITIN). This generally requires the foreign national to send original passport to the IRS - but no one wants to be locked out of their passport for up to 2 months, including the possibility of it getting lost!. The realtors call me for my Certifying Acceptance Agent Services (CAA) where I help get their foreign clients an ITIN without having to send original passports.
As an Enrolled Agent, and a Master of Science in Taxation (MST) degree holder, I help prepare clients get their ITIN and then prepare their NonResident Income Tax returns to help recoup their withheld funds and pay the right amount of tax and get refunds (which most likely is the case).
I will write a separate article on the responsibilities of a foreign buyer who buys US property.
Please call us at 480-442-7063 or go online to set up a consultation on your FIRPTA or US Nonresident Tax return preparation.
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