Foreign Persons Owning U.S. Real Estate
-
Upload
rscottjones -
Category
Business
-
view
6.114 -
download
2
Transcript of Foreign Persons Owning U.S. Real Estate
GOLDSTEIN JONES GOLDSTEIN JONES LLPLLP ATTORNEYS-AT-LAW
Foreign Investors in U.S. Real Estate –
Understanding the Key Tax Rules
Copyright© 2009 Goldstein Jones LLP. All Rights Reserved.
Agenda FIRPTA
When does it apply? What are the procedures? Non-residence rules Taxpayer Identification Numbers Exceptions State issues
Copyright© 2009 Goldstein Jones LLP. All Rights Reserved.
Agenda FIRPTA
Agent liability & Affidavits U.S. Real Property Interest De minimis rule Non-recognition & exclusion Withholding Certificates Corporate Issues
Real estate income Estate tax issues
Copyright© 2009 Goldstein Jones LLP. All Rights Reserved.
FIRPTA – What is it? Foreign Investment in Real Property Tax Act 1980
(FIRPTA) FIRPTA's goal is to force non-resident aliens (NRAs) to
file U.S. returns and pay tax on U.S. source profits 10% withholding tax on U. S Real Property Interests
(USRPIs) sold by income tax nonresidents Tax imposed on amount full amount realized by seller No deduction for expenses Can cause a cash flow problem for seller Duty imposed on buyer (and agent) to withhold tax Certain exceptions apply
Copyright© 2009 Goldstein Jones LLP. All Rights Reserved.
FIRPTA – When does it apply? Foreign sellers
Direct owners or indirectly through a disregarded entity
Foreign corporations selling U.S. real property interests also subject to the rules
Foreign corporations are subject to 35% tax withholding on distributed gains
Foreign corporations may elect US tax treatment as a domestic corporation
Caution re LLCs and certain types of trust arrangements
Copyright© 2009 Goldstein Jones LLP. All Rights Reserved.
FIRPTA – What are the procedures? Forms 8288 & 8288-A record FIRPTA tax withholding
Tax is due 20th day from date of closing
Extended if an application for exemption is in progress
Penalty of $10,000 for failure to collect and pay tax if buying from NRA
IRS has specific FIRPTA Unit handling remittances and exemption applications
Copyright© 2009 Goldstein Jones LLP. All Rights Reserved.
FIRPTA – What are the procedures? Buyer and agent can reasonably rely on Form W-9 residency
certification to avoid withholding
Agents acting against direct knowledge is considered unreasonable
Taxpayers require counsel concerning the residency certification
Nonresident taxpayer must file tax return to claim credit for tax paid or evidence exemption on tax return
Seller notifies buyer of application for exemption from tax withholding prior to closing
Copyright© 2009 Goldstein Jones LLP. All Rights Reserved.
FIRPTA – Nonresident or Not? Real estate attorneys often unaware of tax residence rules
relevant to non-US nationals
Overview of the rules
Seller’s real estate attorney often cannot advise on tax position without recourse to tax attorney/accountant
Buyer’s attorney wishes to rely on W-9 only
Domestic tax rules (including elections available) and applicable Tax Treaty rules complicate the residence position
Selling client is often uncertain whether tax resident
W-9 to be signed under penalties of perjury
Copyright© 2009 Goldstein Jones LLP. All Rights Reserved.
FIRPTA -Taxpayer Identification Numbers In many cases seller remains nonresident but is unaware as
to the need for a Taxpayer Identification Number
Seller receives no credit for withholding tax without an Individual Taxpayer Identification Number (ITIN)
Seller needs the ITIN to file tax return to evidence any exemption from taxation
Apply with tax return/ acceptance agent (Form W-7)
“ITIN Applied For” on any IRS Forms is now unacceptable
Early communication of the need for these numbers is critical
Suggest incorporating language into the real estate contract
Tax remains payable even without an ITIN!
Copyright© 2009 Goldstein Jones LLP. All Rights Reserved.
State Tax Issues State non-resident withholding issues – insurance against non-filers
New York requires the payment of tax at marginal rates of tax.
New Jersey also requires tax to be paid at marginal tax rates and no less than 2% of gross proceeds.
California tax law also requires buyers to withhold 3 1/3% of the total sales price of California real estate. Now extended to all beyond just non-resident sellers.
California escrow agents have a duty to inform buyers of this California withholding tax obligation; NJ requires proof of payment for recording of deed
Each state has separate rules for exemptions from these obligations and its own procedures
Copyright© 2009 Goldstein Jones LLP. All Rights Reserved.
FIRPTA- When is Withholding Not Required? FIRPTA withholding is required unless:
Seller is not a ‘foreign person’, The interest transferred is not a USRPI The seller is not subject to taxation on the
transaction due to an exception The seller qualifies for reduced withholding (i.e.
qualifies for a “Withholding Certificate”)
Copyright© 2009 Goldstein Jones LLP. All Rights Reserved.
FIRPTA – Resident Affidavit
Certify that the seller is not a foreign person – Form W-9
Must be signed under penalties of perjury and set forth the seller’s name, U.S. Tax Identifying Number and home or office address
Most commonly used exemption procedure (since most transactions do not involve foreign sellers)
Buyer (and agents) may reasonably rely on Form W-9
Copyright© 2009 Goldstein Jones LLP. All Rights Reserved.
Debt Financing – USRPI?
Debt financing by original purchaser now selling Purchaser provides credit (i.e. non-equity interest)
not considered a USRPI subject to FIRPTA Foreign lender receives portfolio interest not subject
to tax to NRA Needs to be a bona fide arm’s length loan
arrangement with no “equity” participation Debt obligation has U.S. estate tax consequences to
a nonresident
Copyright© 2009 Goldstein Jones LLP. All Rights Reserved.
FIRPTA – “De Minimis” Exception not required to withhold tax if:
1) the total purchase price for the property does not exceed $300,000, and
2) the buyer must has definite (and carried out) plans to reside at the residence for at least 50% of the number of days the property is in use during each of the first two 12-month periods following the date of the sale.
State rules may differ
Copyright© 2009 Goldstein Jones LLP. All Rights Reserved.
FIRPTA- Withholding Certificates Procedure exists for applying for exemption from
withholding requirement IRS Form 8288-B requiring statement of tax law and
facts evidencing tax exclusion Buyer relieved of responsibility, seller’s cash flow
improved! Applications subject to understanding tax residence
position, application of exemption rules to nonresidents
Full disclosure on IRS Forms which may take 90 days to process
Copyright© 2009 Goldstein Jones LLP. All Rights Reserved.
FIRPTA- Withholding Certificates Bona fide applications in process will delay payment of
withholding taxes (kept in escrow until notification received from IRS)
Typical cases are principal residence sales, like-kind exchanges
Principal residence rules in employment-related moves Full disclosure required on all Forms Buyer or seller may apply All parties need ITINS for Withholding Certificate
Application to be processed IRS “bounces” incomplete applications
Copyright© 2009 Goldstein Jones LLP. All Rights Reserved.
Corporate Ownership FIRPTA imposes U.S. tax on gains from the disposition of
USRPIs by foreign corporations also
A foreign corporation that distributes a USRPI must pay a tax equal to 35% of the gain it recognizes on the distribution to its shareholders
This tax does not apply to 80% corporate owners if the foreign corporation is liquidated. It also does not apply generally in certain non-recognition transactions (e.g., a merger) if the acquired interest is also a USRPI
The normal withholding rules apply to dividend distributions of property to shareholders, i.e., 30% or a lesser treaty rate for dividends attributable to US source income, provided 25% of the corporation’s income is US source.
Copyright© 2009 Goldstein Jones LLP. All Rights Reserved.
Corporate Ownership Additional issues if the US corporation is a U.S. Real Property
Holding Company (USRPHC)
If a corporation qualifies as a U.S. real property holding corporation on any applicable determination date after June 18, 1980, any interest in it shall be treated as a U.S. real property interest for the shorter of the period of five years from that date or the period of ownership
A domestic corporation is a USRPHC if the fair market value of its USRPIs is equal to or greater than 50 percent of the fair market value of the corporation’s worldwide real property interests and all other assets used in a trade or business
Exceptions apply where the corporation sold all of its USRPIs, and another applicable to 5 percent-or-less owners of publicly traded USRPHCs
Foreign Nationals –Real Estate Rentals
Copyright© 2009 Goldstein Jones LLP. All Rights Reserved.
Nonresidents- Rental Income
If a USRPI interest is used by a foreign person or entity for the production of income, IRC section 871 imposes a 30 percent tax rate (or Tax Treaty rate if lower) The income is to be treated as, “income not effectively connected with a U.S. trade or business” (Non-ECI) Mechanism is used to assure the IRS receives tax due at source since NRAs with just non-ECI generally not required to file US tax returns
Nonresidents must file Form1040NR nonresident income tax return on a timely basis
Copyright© 2009 Goldstein Jones LLP. All Rights Reserved.
Nonresidents- Rental Income The foreign person or entity can make an Election under
IRC section 871(d) to treat the real property income as income effectively connected with a U.S. trade or business (ECI)
This election allows deductions and subjects net amount to tax at graduated tax rates. NRA must file a US tax return
In addition to the election, the foreign person needs to file W-8ECI with the payor of the income to identify it as ECI to relieve withholding obligation
Estate Tax Issues
Copyright© 2009 Goldstein Jones LLP. All Rights Reserved.
Nonresidents – Estate Planning Issues
U.S domestic estate tax exemptions DO NOT APPLY to U.S. nonresidents
Definition of non-residence for estate and gift tax purposes differs from that for income tax
Notion of “domicile” or “permanent home”
Estate tax nonresidents can have SIGNIFICANT estate tax exposure and require counsel
Real estate is a common trigger for this exposure
Non-immigrant visa holders must take counsel
Green-card holders may also be affected
Copyright© 2009 Goldstein Jones LLP. All Rights Reserved.
Nonresidents – Estate Planning Issues US nonresidents for estate tax purposes are taxed on “US
situs” assets only but exemption is ONLY $60,000!
Tax Treaties may help but require disclosure of worldwide assets
Life insurance, offshore structures may assist but require careful consideration – no silver bullet
U.S. citizens with non-U.S. citizen spouses may also have other problems passing assets to second spouse free of tax
Foreign purchasers of U.S. real estate should consider formation of U.S. will, revocable living trust arrangements
Copyright© 2009 Goldstein Jones LLP. All Rights Reserved.
Circular 230 Disclosure
Circular 230 Disclosure: Internal Revenue Service regulations provide that, for the purpose of avoiding certain penalties under the Internal Revenue Code, taxpayers may rely only on opinions of counsel that meet specific requirements set forth in the regulations, including a requirement that such opinions contain extensive factual and legal discussion and analysis. Any tax advice that may be contained herein does not constitute an opinion that meets the requirements of the regulations. Any such tax advice therefore cannot be used, and was not intended or written to be used, for the purpose of avoiding any federal tax penalties that the Internal Revenue Service may attempt to impose.
The information contained herein is general in nature and is not intended as a substitute for specific legal advice nor is it to be relied upon for individual circumstances.
Questions
Thank You!
Copyright© 2009 Goldstein Jones LLP. All Rights Reserved.
Contact
R. Scott Jones, Esq. (914) 214 5579, [email protected] Westchester & Manhattan
Web: www.goldsteinjones.com