US Buyer buying from International Seller - IRS tax withholding

[disneyberry]

However as a general comment related to international sellers. Most parties are unaware that the IRS requires the withholding of 10% of the "gross" sale price which is to be submitted to the IRS as pre-payment for any taxes that may be owed as a result of the sale. While the forms are generally completed by the title company and the payment is delivered through the title company; the obligation is that of the buyer (not the seller) to deliver funds to the IRS. The IRS requires payment within 21 days of transfer and when late, there is a penalty, as you have noted. The international seller is afforded the opportunity to file 1040NR to obtain a refund of the payment. Another opportunity to avoid the tax altogether is have the international seller request (prior to sale) a certificate from the IRS that reduces the tax liability. This option is generally overlooked. There is a third option for residents of citizens of countries that have a tax treaty with the U.S. Unfortunately, several title companies overlook this obligation and assume the payment is not required and fully fund the seller. Please note, the IRS will seek the tax payment from the buyer, not the seller.

I came across this post while searching for special considerations when trying to buy a DVC resale from an international seller.
Has anyone had personal experience with this? Just wondering what might be expected and how your experience went.

 

[supersnoop]

The title company should handle everything for you. Essentially, they have to send some of the money to the IRS instead of sending it to the seller. Then the seller has to file with the IRS to get it back if they don't actually own any taxes.

 

[drusba]

The Foreign Investment in Real Property Tax Act, FIRPTA, requires, as to any sale of real estate in the US by a foreign seller, that 10% of the sale price be withheld and transferred to the government to be held until the seller files needed tax forms to declare and pay any actual capital gains taxes, which for a timeshare are usually far less than the 10%, and the 10% is forfeited if the seller fails to make the proper filings. The party who can be liable if the law is not followed is the buyer. Thus, the onus is on the buyer to assure it is done.

In reality, real estate brokers and closing companies are fully familiar with the law and have a standard process for compliance which has the 10% designating for a temporary escrow! while the seller as part of the sale process files forms needed for the seller to get a tax ID number and thereafter file forms to show the sale and actual capital gains tax that may be owed as part of the closing process, which is the amount actually paid to the government, and then the government issues an acceptance of that amount, after which anything in the escrow is released.

The seller's need to get a tax ID can actually lead to delay in the sale process, including because the government is not always quick in issuing one. Usually there is no real issue for the buyer except possibly for some delay. However, there is always some minor risk of having idiots for a broker and title company, which fail to follow usual procedure and the onus is on the buyer to assure things are done so if you decide to proceed, you should probably discuss the issue with the broker to assure things are being done that are needed to be done.

 

[AulaniNutz]

The Foreign Investment in Real Property Tax Act, FIRPTA, requires, as to any sale of real estate in the US by a foreign seller, that 10% of the sale price be withheld and transferred to the government to be held until the seller files needed tax forms to declare and pay any actual capital gains taxes, which for a timeshare are usually far less than the 10%, and the 10% is forfeited if the seller fails to make the proper filings. The party who can be liable if the law is not followed is the buyer. Thus, the onus is on the buyer to assure it is done.

In reality, real estate brokers and closing companies are fully familiar with the law and have a standard process for compliance which has the 10% designating for a temporary escrow! while the seller as part of the sale process files forms needed for the seller to get a tax ID number and thereafter file forms to show the sale and actual capital gains tax that may be owed as part of the closing process, which is the amount actually paid to the government, and then the government issues an acceptance of that amount, after which anything in the escrow is released.

The seller's need to get a tax ID can actually lead to delay in the sale process, including because the government is not always quick in issuing one. Usually there is no real issue for the buyer except possibly for some delay. However, there is always some minor risk of having idiots for a broker and title company, which fail to follow usual procedure and the onus is on the buyer to assure things are done so if you decide to proceed, you should probably discuss the issue with the broker to assure things are being done that are needed to be done.

 

[AulaniNutz]

Great description of the problem/issue. Should be marked sticky or added somewhere!

 

[a742246]

This happened to me once (as a buyer) I got a tax bill from the IRS, I simply call the title insurance company and they handled it. About a month later I got a letter from the IRS basically saying I do not owe anything!