Common Pitfalls in Foreign Investment: Selling Property

As a U.S. citizen purchasing property in a foreign country or as a non-U.S. citizen purchasing property in the United States, there are many factors that you need to keep in mind to ensure you are abiding by the necessary regulations while also earning as much profit from your property as possible. By keeping these common pitfalls in mind, you will be sure to avoid them in order to have the best experience possible when selling your real estate investment.

Waiting Too Long to get a TIN

To sell your property, you will need to obtain a Tax Identification Number or TIN. To obtain a TIN in the United States, you only need to file a W-7 or W-7SP to begin the process. The buyer or estate agent will need to see the TIN before ever considering making a purchase of the property. Failure to file for a TIN in a timely manner can result in the loss of potential buyers, thereby delaying the selling process or even reducing your chances to obtain maximum profits.

Filing FIRPTA After Closing

One tax burden that you must be sure to consider when selling your property is the Foreign Investment Real Property Tax Act, or FIRPTA. FIRPTA is a tax law designed by the United States to ensure foreign real estate owners pay income tax when selling their property. Depending upon the value of the property, you may be required to allow the buyer to withhold 10 or 15 percent of the agreed upon price of the property. These funds are then sent to the IRS by the Closing Agent to pay toward your tax burden. If your tax burden is less than this amount, you qualify for a refund. To obtain this refund, you will need to file the necessary paperwork either before, during or after the closing process.

If you file an Early Release of Cleared Withholding either before or during closing, you may be able to get your refund in as little as 90 days after closing. If you wait to file the necessary paperwork after closing, however, it can take as long as 18 months to obtain your refund. Therefore, you should be sure to include this paperwork as part of the closing process in order to get your refund as quickly as possible.

Failing to Report Taxes

As the foreign owner of rental property in the United States, you can choose to file income taxes each year. Just as with a U.S. resident, you can deduct expenses related to maintaining your rental property in order to reduce your tax burden. For foreign property owners, this is called the “net election”. Unlike U.S. citizens, however, you must file your taxes each year in order to claim these deductions. If you choose to wait until you sell your property before reporting your income as required by law, you will no longer be allowed to make these deductions. You will, however, be subject to a federal income tax of 30 percent of the gross rent income that you earned with the property. Expect to pay these taxes when selling your property if you have not been reporting your income and deductions all along.