FIRPTA Tax Blog
By: Michael W. Brooks, Esq.
And it drags on… this Coronavirus. And the Coronavirus continues to be a drag on the departments and services provided by the United States government. The government and services of the State of California continue to have major difficulties as well. Plus, we hear stories form our clients around the world on how backed up government services and departments continue to be in their home country. So it’s not just us in the United States having all the trouble, if that makes us feel better. It’s everywhere. Fine, but how are the government services doing which we at DIRECTS (Domestic and International Real Estate Closing Tax Services) must concern ourselves with? Specifically, how are the IRS and FTB doing in their vital roles relating to real estate transactions (and of course we at DIRECTS really care about real estate transactions entered into by non-US persons/ entities)? It’s still a slog. Let’s take a look.
8288-B/ Withholding Certificate Applications
You’re from the UK and you bought a house in LA in 2015 for $2M. You’re selling it this February for $2.8M. You spoke to Michael Brooks at DIRECTS and he told you, after factoring in the cost of your realtor and the cost of the kitchen renovations you did in 2017, you might owe the IRS $54,000 in tax for this transaction (based on a let’s say around a $400,000 net profit). You’ll live with the $54,000 tax to the IRS, you made a nice profit on the deal. Ah but Mr. UK resident, do not forget the IRS non-US seller withholding tax. Since you are a foreign seller, $420,000 ($2.8M x 15%= $420,000) must be “withheld” at the time of sale. Sure, eventually you’ll receive your $366,000 refund ($420,000 (withholding tax) minus $54,000 (final tax owed IRS) = $366,000), but when??? Without utilizing the 8288-B/ withholding certificate option, you probably won’t receive your $366,000 refund until maybe summer 2023 (a year and a half, easy). So our UK resident wants to use the 8288-B option, of course. Prior to the Coronavirus outbreak, our foreign seller might have waited four months or so to obtain his $366,000 refund (might have had it in June 2022 for a February 2022 sale). But now, with the IRS still very backed up in this special 8288-B/ FIRPTA unit, our UK resident selling in February 2022 utilizing the 8288-B option might have his refund by September or October 2022. Plan on an eight or nine month wait foreign sellers utilizing the 8288-B/ withholding certificate option. It’s still better than waiting until the middle of the next calendar year by utilizing the traditional tax return/ refund method, but it’s just not the smooth four month wait time from pre-2020/ Coronavirus pandemic.
IRS ITIN Processing
We know foreign sellers must obtain an ITIN (or they will never obtain a refund of their IRS withholding tax). Obtaining an ITIN is an absolute prerequisite for any foreign seller who wants a refund of their 15% withholding tax (unless they have a US social security number, which is unlikely). But ITIN’s can be very tricky to obtain. You will only get them if you apply at the right time. I’m a foreign seller, my place is on the market, I heard I have to obtain an ITIN or I won’t obtain a refund of the 15% foreign seller withholding tax, so I’ll just go ahead and apply while my place is on the market (but prior to the sale)- but the IRS will not give it to you! You must wait until the sale is in escrow to apply for the ITIN, the IRS is very fussy about issuing these tax ID numbers. Do not apply early for these ITIN’s, a rejected ITIN application (which is exactly what will happen if you apply at the wrong time) can totally screw up the ITIN process, which can absolutely screw up a foreign seller’s tax refund (or 8288-B application). The good news is the IRS ITIN’s, processed out of the IRS office in Austin, Texas, continued in 2021 relatively unimpeded from the virus. If you know what you’re doing, and the foreign seller is able to apply at the right time with proper application and attachments, the IRS should issue you an ITIN within about two months of the application’s submission. The IRS ITIN office in Austin continues to be a success story.
More on where we are with the IRS in the beginning of 2022/end of 2021 in part 2 of this blog post….