David has represented numerous buyers and sellers from pre-contract to closing. In addition to so called "traditional transactions", David is experienced with the unique issues that arise when dealing with foreign sellers and foreign buyers.
If you are buying a U.S. property from a foreign seller, or are a foreign seller of a U.S. property, some unique issues arise.
When a seller of residential property is a foreign person, the IRS requires the purchaser (not the seller) to withhold 10% of the purchase price. This 10% must be sent to the IRS within 20 days of closing.
The law that requires this is the Foreign Investment in Real Property Tax Act, more commonly known as "FIRPTA". The purpose is to prevent foreign sellers from taking the sale proceeds out of the U.S. without paying tax on any gain.
Failing to realize FIRPTA applies to a transaction can have disastrous consequences for both parties. For the non-foreign buyer, failing to withhold the 10% to the IRS and instead paying the entire purchase price to the foreign seller could later result in the buyer being responsible for paying an additional 10% (plus interest and penalties) of the purchase price. In other words, a $500,000 house could end up costing more than $550,000.
In addition, failing to address FIRPTA early on could delay or even prevent a closing. For example, if a foreign seller owes more to a lender than the sale price, there may not be 10% available to withhold at closing in order to complete the sale.
Irrespective of whether you are the buyer or the seller, when a foreign seller is involved it is important to address FIRPTA early on. A waiver of FIRPTA withholding can be obtained but it takes time to do so. An attorney knowledgeable about FIRPTA is critical to avoid problems later on.
First, a foreign purchaser is likely to be a foreign seller at some future point. Therefore, the FIRPTA obligations discussed above will apply once you decide to sell the property.
Second, when a foreign owner of U.S. property dies, there may well be federal and state estate tax issues arising from their ownership of U.S. property. Effective estate tax planning could minimize this impact.
Third, foreign owners of property that produces income may be subject to certain withholding obligations with respect to that income. In addition to rents, Common Area Maintenance charges, also known as CAM charges, may also be subject to withholding. Proper planning and lease preparation are critical to avoid an unexpected result later on.
Fourth, if a foreign person provides funds to a U.S. citizen or resident to acquire a U.S. property, issues such as gift tax, reporting obligations and more may need to be addressed.
These web pages are for information only. They do not constitute legal advice. These pages do not constitute, nor do they create, an attorney-client relationship between the visitor and the Law Office of David Welch.