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property_tax_conceptRecently, I talked about the growing number of multicultural home buyers entering the American Real Estate market. But there is also some very important information American buyers need to heed if they are buying a home from a foreign owner.

Thomas L. Smitha, JD CPA is Associate Director of Tax Services at Berkowitz Pollack Brant Advisors and Accountants in Florida (bpbcpa.com). He recently warned about certain tax compliance hazards unwary buyers of homes and other types of foreign-owned real property could face.

Smitha warns that American buyers who fails to withhold 10 percent from the purchase price of foreign-owned properties to remit to the Internal Revenue Service may be held liable for a U.S. tax that foreign sellers are supposed to pay.

According to Smitha, a federal law known as FIRPTA (Foreign Investment in Real Property Tax Act of 1980), obligates buyers of land, homes, stock in real estate companies and other types of real property interests to determine, for tax withholding purposes, whether the seller is a tax resident of the United States or a foreign country.

The withholding requirement exists because foreign persons and foreign companies that sell U.S. real property interests often are subject to U.S. income tax. The Internal Revenue Service generally will treat any gain on such a transaction as U.S. taxable income (or, in technical terms, “effectively connected income”) irrespective of the transaction’s connection to a U.S. trade or business, Smitha says.

Buyers of U.S. real property interests must withhold 10 percent from the purchase price if the seller is a foreign person. Buyers are required to send this withheld amount, together with a completed Form 8288, to the Internal Revenue Service within 20 days of the transaction.

Smitha says that tax withholding can happen gradually, rather than all at once, if a foreign seller accepts a series of installments payments from a buyer of U.S. real property interests. Hypothetically, a buyer who agrees to pay 10 percent of the total price annually over 10 years could withhold a tenth of the total price and remit this amount to the IRS each year.

The bottom line: anyone purchasing real property from a foreign owner should consult with the IRS, their accountant or a trusted tax attorney before completing the sale to be sure the transaction is handles within the scope of FIRPTA.

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