What You Need to Know When You Are Buying a Home From a Foreign Seller
You've put in an offer that the seller accepted on your new home. Now the time clock has begun - completing all tasks to move you towards closing on the house of your dreams. You may be scheduling an inspection of the home. You may be filling out and proving a lot of paperwork to your lender if you are buying the home with a loan.
But, you've also written a big check for earnest money, and you have deposited your earnest money to the escrow company.
Escrow companies are neutral third parties that hold your earnest money and facilitate the transaction.
The escrow company wants to know who you are. And they need to verify you are who you are for legal reasons. As part of the escrow company's process, they will ask both the buyer and the seller to fill out a welcoming package of some sort.
This welcome packet asks you for personal information like your legal name, social security number and marital status.
Interestingly, they will also ask you if you are buying the home for your personal residence or if it is for investments purposes. Why is that exactly?
There is something called FIRPTA (Foreign Investment in Real Property Tax Act). Yes, it's about taxes. You probably signed a document in your real estate contract that asks the SELLER is or is not a foreign person for purposes of US income taxation.
You might not really care - but as a buyer - you should. Because the tax law says the burden of withholding tax for a foreign seller is the burden of the BUYER. Not the seller, not the real estate agent, not the escrow company - but the BUYER. The tax withholding amount on investment properties is 15% of the purchase price. So, on a $1,000,000 home, the withholding will be $150,000 if the buyer is purchasing the home as an investment. (It can be as low as 10% if you are buying the home for personal use, but withholding amounts are determined by the purchase price of the home.)
Just as the escrow company has asked you, the buyer, to fill out certain forms - they also ask the seller several questions to determine if the person is a foreign person for purposes of US income taxation.
Here's the part where I'm going to scare the buyer a little bit (but don't worry - if escrow has done their job properly, everything will be okay).
Remember when I said it was the BUYER's burden for tax withholding? Imagine months from now, you've closed on your home that you happened to purchase from a foreign seller. And you a letter from the IRS. No one likes those letters. But when you open it - it's saying you owe tens of thousands of dollars WITH INTENT TO SEIZE YOUR PROPERTY. So, after your immediate heart dropping response -take a moment to breathe. Then call your escrow company. The escrow company you used to facilitate the transactions should have done their due diligence and cut a check to the IRS for the proper withholding at the time of closing. (Escrow companies only have a limited period of time to send out the check to the IRS or the IRS will fine the escrow company.)
Sometimes when the escrow company sends their check to the IRS, the IRS doesn't apply the check to the correct account. So, all the escrow company needs to do is send a copy of the cancelled check to the IRS to show proof of payment, and that should satisfy your status with the IRS.
If you purchase from a foreign seller, the escrow company should send you a tax document - a 8288 A form to both the buyer and the seller in the transaction. It basically looks like a W2 or 1099. The seller needs it for their tax purposes (to perhaps get some of their withholding refunded to them). And the buyer gets it for proof of withholding.
A few take aways for both buyers and sellers:
1. Have a good, experienced real estate broker that can help you through the transaction - one that will write the contract properly.
2. Utilize a reputable escrow company. It could be the difference in a huge tax bill for the buyer.
3. If you have questions about your taxes - ask your CPA. Remember, your real estate broker may have a lot of knowledge - but it is outside our scope to advise you on tax and legal matters.
Kristin Bushnell is Designated Broker of Bushnell Real Estate Solutions and Co-owner of Bushnell Craft Brewing Company in Redmond, WA. Check out my profile here.
If you are ever interested in chatting about real estate, contact me at firstname.lastname@example.org or call me at 425-559-1355. I'll buy you a beer (or non-alcoholic beverage, if you prefer!), and we can chat about real estate until your heart's content.