FIRPTA Tax Blog
By. Michael W. Brooks, Esq.
The US government shutdown finally ended on January 28th– five weeks after it started. The full force of the IRS is back at work. What does this mean for the (in many cases) large refunds due to the non-US persons who sold US real estate in 2018 (and before), who were subject to a 15% IRS withholding tax (15% of the gross sales price must be sent into the IRS at the close of the sale…that’s the US tax law for non-US persons selling US real estate (known as “FIRPTA”))? In a normal period, a foreign investor who sold US real estate in one calendar year (where the 15% was sent into the IRS at the close of the transaction), could probably count on receiving their withholding tax refund around the summer or fall of the following calendar year (provided they were working with a tax professional who knew foreign real estate seller tax withholding system well- such as DIRECTS, Inc.). But in (late 2018 and) early 2019, the US experienced a five-week government shutdown, where a closed IRS still received thousands of forms, letters and overall correspondence from individuals from the US and not from the US. That’s a lot of piled and backed up correspondence IRS officials just back at work are going to have to sift through (are they even permitted to process tax refunds without first going thought the huge pile up in unopened mail?). In addition, each January apparently the IRS engages in a considerable amount of training of new employees (and even older ones), as each tax year brings with it changes that differ from prior years, and all IRS employees must prepare for the new changes. So even though the shutdown is already in the rear-view mirror, many tax experts are predicting significant delays to the IRS refund schedule caused by the mess the 2019 shutdown caused to the IRS in January 2019. While all this is going on at the IRS, we still have so many 2018 (and earlier) non-US sellers of US real who ae expecting big refunds in 2019. Will this IRS delay affect them? Let’s explore below.
The Shutdown’s Effect on The Withholding Tax Refunds Due to 2018 Foreign Sellers of US Real Estate
You are a Canadian who purchased a Palm Springs, California, house in 2014 for $550,000, and in March 2018 you sold the Palm Springs house for $530,000, escrow sent in $79,500 (15%) to the IRS and you are eager for your full $79,500 refund. Or maybe you are an investor from China who purchased Irvine real estate a few years ago for $1,000,000, in May 2018 you sold the Irvine house for $1.2M. The escrow in Irvine had to send $180,000 into the IRS in May 2018 for the $1.2M sale. But after deducting for relator fees, escrow fees and the cost of new remodeled kitchen you added, you (the Chinese investor who bought and sold an Irvine, CA, home) are netting a profit of only $100,000 for your sale. You might owe the IRS around $15,000 for your net gain of $100,000 (the IRS capital gain rate at the lower levels is 15% x the profit on sale), but you are still entitled to a large refund of $165,000 (180,000- $15,000= $165,000 refund due). When will our non-US persons receive their large refunds from their 2018 sale? My guess- because of January shutdown, it’s going to take a long, long time. Why? Thy January shutdown backed up everyone’s correspondence, and the (already stretched-thin) IRS must probably review all the backed-up correspondence before starting the refunds; foreign seller withholding tax refunds may not be on the top of the IRS priority list in a good year (that’s a lot of tax dollars leaving the US Treasury each year, not sure they are ever in a great hurry to let these out); and finally, the FIRPTA-related refund process is complex, and the IRS will not issue the refund unless every step is done perfectly (they are happy to keep the tax if the steps are not done perfectly)….all these factors look a little dangerous to me (in terms of the speed in which foreign investors in US real estate might receive their refund in 2019). Let’s discuss more in Part 2 of this blog…