FIRPTA Tax Blog
At DIRECTS (Domestic and International Real Estate Closing Services), we help 100’s of non-US sellers of US real estate obtain their US Individual Taxpayer ID Numbers (ITIN’s) each year. The ITIN procurement process is critical for foreign sellers of US real estate. If they do not successfully obtain an ITIN, they will never obtain a refund of the large 15% of the gross sales price withholding tax withheld from them at sale (which is entirely refundable if they did not make a large gain on their sale of US real estate). The ITIN procurement rules have recently undergone significant change (although they have returned, more or less, to where they were before the changes mandated by Congress in January 2017).
Q1) What Were the Changes to the ITIN Program?
A1) Effective January 1, 2017, certifying acceptance agents (private tax professionals who are approved by the IRS) (“CAA’s”) were no longer permitted to certify the passports of non-US sellers of US real estate. This became a huge problem for foreign sellers of US real estate, who need ITIN’s to obtain refunds of their IRS and withholding taxes.
Q2) What is the Significance of the Certified Copy of the Passport (and the ITIN Generally) For Foreign Sellers of US Real Estate?
A2) Non-US sellers of US real estate are subject to an IRS withholding tax (generally 15% of the gross sales price) at the time of sale (plus the standard California (or other state) withholding taxes). This withholding tax is more properly viewed as a security deposit requirement- an amount collected at the time of sale to ensure that if the foreign seller does owe a tax in the US (based on whether the seller is selling the US real estate for a gain), the IRS is assured of having the tax and therefore does not have to keep it’s fingers crossed for a check to come in from a non-US citizen living abroad. Take, for example, a case where a non-US person purchased US real estate a couple years ago for $1,000,000, and in February 2017 sells it for $1,200,000. The foreign party in this instance might owe a tax to the IRS in the neighborhood of $30,000 (15% individual capital gains rate x $200,000 gain on sale), but because they are a foreign seller escrow must withhold a tax of $180,000 (15% x gross sales price) at the time of sale. The foreign seller in this case is entitled to a $150,000 refund, and will likely obtain it in the year after the sale when the seller files a one-time US tax return (or even in the year of sale via the 8288-B withholding certificate application). But here’s the catch- until the foreign seller obtains an ITIN, the foreign seller will never receive a refund of any amount from the IRS. The tax will languish in the IRS for years (or forever) if the foreign seller cannot obtain an ITIN.
Q3) The Non-US Seller Must Submit a Certified Copy of their Foreign Passport to Obtain an ITIN. As of January 1, 2017, Who was Permitted to Certify Passports (and Prepare Certified Copies of the Passports) of Non-US Sellers of US Real Estate?
These were the only options as of January 1, 2017:
A3) (i) When the foreign seller is not present in the US– non-US sellers of US real estate can go (or potentially mail their passport) to: (a) a government passport office in their home country; (b) a US embassy or consulate in their home country; or (c) if in a foreign country other than their own country- to their home country’s embassy or consulate in the other foreign country. However, whether any of these will actually work (other than the US embassy) in a given country is uncertain.
(ii) While in the US– non-US sellers of US real estate can go (or potentially mail their passport) to their home country embassy or consulate in the US (such as the Canadian or Chinese Consulate in Los Angeles), but no guarantee a given consulate will provide this service. Additionally, the IRS states foreign sellers can utilize IRS Taxpayer Assistance Centers where the IRS will certify the passports (but IRS officer workers are frequently not properly prepared to assist foreign sellers of US real estate obtain ITIN’s, and I think it’s unlikely an IRS Taxpayer Assistance Center will work for foreign sellers of real estate attempting to obtain an ITIN).
(iii) Mail in the Original Passport to the IRS– always an option, but the IRS will have the foreign seller’s real passport for months (yikes).
Q4) As of the End of April 2017, the IRS informed DIRECTS (Via Phone Conference) that CAA’s Were Once Again Permitted to Certify the Passports of Non-US Sellers of US Real Estate (and Prepare Certified Copies of the Passports) in Face to Face Interviews with the Non-US Sellers.
A4) As of April 2017, DIRECTS (and all CAA’s) are once again permitted to prepare certified copies of passports reviewed in face to face interviews. This is a reversion to the former rules (allowing CAA’s to certify passports in face to face interviews) and will ease significantly the challenge faced by foreign sellers in the Southern California area, who will no longer have to rely on their Southern California consulate office of their foreign country (which may, or may not, have provided the passport certification service…and not all countries have a Los Angeles consulate). DIRECTS can again certify foreign seller passports in our offices in Arcadia and Palm Desert California. We can also assist foreign sellers who are not in the country properly assemble the ITIN application, although they will have to use the US Embassy option in their foreign country at issue. Call us at 760-346-6140 or email us at info@directsllp.com for more details.
Michael W. Brooks