I. The Foreign Person Test: Is your client an alien resident of the US?
A. “Green Card Test”- has the client been admitted for US permanent residence and holds a green card? If so, considered US tax resident.
B. “Substantial Presence Test” – has the client been physically present in the US for 183 days or more during the current calendar year? If so, considered US tax resident.
i. Alternative to the Rule: “3-Year Look-Back Test” – if the client has been physically present in the US for at least 31 days in the current calendar year, then he/she may be treated as a US tax resident IF each day of presence in the preceding year (counted as 1/3 of a day), and each day of presence in the second preceding year (counted as 1/6 of a day) all add up to at least 183 days.
II. How FIRPTA Affects Your Client
A. What does it Mean? – FIRPTA stands for the Foreign Investment in Real Property Tax Act and regulates taxation of nonresident alien individual on sales or other disposition of US real property interests. (Section 1445 of the Code)
B. Effects of FIRPTA – any purchaser of US real property from a foreign seller (non US resident) must withhold 15% of the gross purchase price and remit such amount to the IRS within 20 days of closing. NOTE: Seller must pay 15% of sales price, but burden falls on the PURCHASER to file Form 8233 Withholding Tax Form , and send payment to IRS. Otherwise, Purchaser is liable for any uncollected withholding tax, penalties and interest charges. (I suggest ATTY ESCOW as opposed to Certified Bank check for tracking abilities)
C. Out of State NY Seller Tax : IT2663– NY state capital gains tax is paid IN ADDITION to Firpta, and NY tax is 8.82% of NET profit (after all deductions)
III. EXCEPTIONS TO FIRPTA
A. Multiple Sellers: Foreign and US owners – instead of taxing the entire gross sales price 15%, only the amount allocated to the foreign seller will be subject to FIRPTA.
B. IRS Issues Withholding Certificate – if the Seller applies for a withholding certificate from the IRS prior to closing claiming entitlement to a reduced or exempt withholding amount, then the amount of tax will be calculated based on the IRS’ determination as provided in the certificate.
i. Reasons for Granting the Certificate:
a. The 15% withholding amount would be more than the Seller’s maximum capital gains tax liability
b. Withholding of the reduced amount would not jeopardize collection of the tax,
c. The exemption from U.S. tax of all capital gain realized by the Seller (ie: property sold at a loss, less than original purchase price), or
d. An agreement for the payment of tax providing security for the tax liability, entered into by the Purchaser or Seller.
C. Residential Use Exception- foreign Seller is exempt from FIRPTA if the Purchaser is a US individual and intends to use the property and the existing structure as their primary residence AND purchase price is under $300,000.
D. Treaties- foreign sellers are subject to 30% capital gains tax, but can be reduced by up to half (ie: 15%) if US holds treaty with foreign country.
E. VISA’s- if seller is here on work Visa and pays US income tax then they are exempt
F. LOSS – If seller sells at a LOSS then they are exempt
IV. ITIN (International Tax ID Numbers)
A. IRS issues ITINs to individuals who are required to have a U.S. taxpayer identification number but who do not have, and are not eligible to obtain a Social Security Number (SSN).
B. ITINs are issued regardless of immigration status because both resident and nonresident aliens may have U.S. tax return and payment responsibilities.
C. IRS issues ITINs to foreign nationals and others who have federal tax reporting or filing requirements and do not qualify for SSNs.
V. TAXATION OF RENTAL INCOME
A. Rental Income Tax for Foreigners “INVESTORS”: foreign investors are subject to a flat rate of 30% of all gross rental income and must be withheld by the party paying rent proceeds to the owner (ie: property managers).
a. Tax treaties may be in effect to reduce this amount up to 50%.
b. Income is connected with a US business.
c. May elect to have passive rental income taxed as if it were connected with a US trade or business by timely filing with income tax return.
B. Rental Income for Foreign “BUSINESS OWNERS”: foreigners who purchase property, earn rental income and are “engaged in a U.S. trade or business” will be taxed on a net income basis.
i. Standard of Proof: cannot consist of merely passive activity such as net leases in which renters pays rent, taxes, operating expenses, and interest on mortgages and insurance.
ii. Acceptable Business Uses: many commercial uses such as operating a shopping center, hotel, etc. where owner pays all operating expenses, taxes, and so forth. Thus, will not be subject to 30% withholding, and will be taxed at ordinary progressive rates on the NET INCOME.
A. Foreign purchaser does NOT need US social, and may apply with issued ITIN.
B. Tax returns in foreign country of residence required and foreign tax returns
C. Amount of cash required for downpayment is greater
D. Value of property increases borrower’s chances for better rates & terms