If you are buying real estate from a non-U.S. resident, there are certain steps you need to follow in order to properly complete the purchase. Failure to follow these steps could result in negative tax consequences. Here’s what you should know.

What are the steps?

If you are buying real estate, you may unknowingly become a ‘withholding agent’, which will require you to take extra steps during closing.

When a non-resident alien (NRA) sells property located within the U.S., default rules require that 15% of the total selling price must be withheld and remitted to the IRS on behalf of the NRA seller.

The sale is a taxable event for the seller, and barring this prepayment of tax, it would be much more difficult for the IRS to enforce their rules and collect taxes due. Failure to follow these rules could result in you being personally liable to the tax, plus interest.

Do I need to fill out a form?

With the help of your closing attorney, you’ll need to complete and submit Form 8288, U.S. Withholding Tax Return for Dispositions by Foreign Persons of U.S. Real Property Interests, to be sent to the IRS. Copies of Forms 8288-A, Statement of Withholding on Dispositions by Foreign Persons of U.S. Real Property Interests, will also be completed and sent to the IRS and seller. The seller utilizes the Form 8288-A to complete their tax return. These forms are to be completed on or before the closing date of the sale.

Watch out for timing issues

While the default rule is that 15% of the gross proceeds amount is required for withholding, this can present inconvenient timing issues for NRA sellers that will be recognizing little to no actual gain on the transaction. Relief from this situation is available by filing Form 8288-B, Application for Withholding Certificate for Dispositions by Foreign Persons of U.S. Real Property Interests, ahead of the closing date. If granted, the IRS will issue a withholding certificate to you, indicating the amount of withholding to enforce (15% of the expected net gain, rather than gross proceeds).

What happens when you don’t get a response from the IRS?

If the Form 8288-B application has been sent, but an IRS response is not received by the date of closing, you get a reprieve from the remittance deadline. The full 15% should be held-back from the closing check and put in an escrow account by your closing attorney. If the IRS acquiesces to the lower withholding, the extra funds can be released to the NRA seller, but if the IRS denies the application, the full amount should be remitted.

Keep these deadlines in mind

Submission of Forms 8288 and 8288-A, as well as remittance of the withholding amount, are due within 20 days after the closing date of the transfer if no Form 8288-B application was made. If the Form 8288-B was filed, but response was not received prior to closing, the due date is delayed until 20 days after the IRS mails you the withholding certificate or notice of denial.

As with most tax rules, there are exceptions and qualifications to the above, generalized rules. Consultation with tax professionals is recommended.

We can help! Contact our International Tax Services team for assistance.