Tax withholding for foreigner's U.S. home
I'm buying a home from an individual who is a foreigner.
The attorney who is looking at the contract says that I'm responsible to withhold
and pay 10 percent of the purchase price of the property to the IRS. He says if
I don't do this, I could be held responsible for that 10 percent. I don't want
to lose the deal, but I don't want to be on the hook for another 10 percent. What
are my options?
The IRS is deputizing you as a tax collector. The good news is that
whoever the foreigner sells the home to will have the same withholding
responsibility, if properly counseled as you are. Of course the
seller might not like it, so it is his responsibility to figure
out what his tax obligation will be, and if he thinks it is less,
he can ask that the 10 percent be reduced.
Since the tax rates on capital gains have been reduced
to 15 percent of the gain -- on property held for more than one
year, most sellers will owe less than 10 percent of the selling
off, you do not have to withhold if the selling price of the property is $300,000
or less and you will use it as your principal residence. (If you apply for a mortgage,
are you checking the owner-occupied box?) If this exception doesn't help, the
seller is usually stuck with the withholding. He can ask that the tax withholding
be reduced to his actual tax by applying before the closing. He would do this
by completing Form
8288-B prior to closing.
While you're technically responsible
for the withholding, the title company is generally the intermediary that handles
the paperwork. Usually, the title company will hold back the 10 percent and keep
it in its escrow account until the IRS answers the seller's application for reduced
withholding, which can take 90 days. Nobody ever waits the 90 days to close. Once
the title company hears back from the IRS, it cuts a check to the seller for the
excess withholding and pays over to the IRS the actual tax. Form
8288 and 8288-A
are sent to the IRS with the correct tax and they are usually issued under your
name as the withholding agent. Since the title company has 20 days to send the
money to the IRS, you want to make sure that it is done in a timely manner. Otherwise
you might get a bill for interest on late payment.
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