By Michael W. Brooks, Esq.
At DIRECTS, all we do is deal with foreign seller (of US real estate) withholding tax issues (all day, every day). Here are some observations from 2019….
IRS Issuing ITIN’s for Foreign Sellers of US Real Estate in Around Six to Eight Weeks in 2019
ITIN’s are taking about six weeks to eight weeks to be issued by the IRS upon proper application. In a good year, ITIN’s would be issued in as quickly as three weeks. But in 2019, it’s taking six to eight weeks. Remember most foreign sellers will go into escrow without an ITIN. And because of the IRS’ ITIN rules, a foreign individual can generally only apply right before close of escrow. Most foreign sellers of US real estate will not have an ITIN at closing, and escrow should not expect them to have one. But they should apply (properly) at closing of escrow, or they may have difficulty obtaining the refund of their 15% withholding tax. So currently, foreign sellers of US real estate are receiving ITIN’s about six to eight weeks after the closing.
IRS Issuing 8288-B Withholding Certificates in About 3 to 4 Months After Closing in 2019
Recall IRS Form 8288-B withholding certificates are the optimal way for a foreign seller of US real estate to avoid sending the required 15% (x the gross sales price) withholding tax into the IRS at closing (if that 15% goes into the IRS, the foreign seller is going to have to wait probably at least a year to a year and a half to get their refund from the IRS- and many never get their refund!). When a foreign seller applies for an 8288-B withholding tax certificate, the escrow company (or title company) must agree to hold the 15% withholding tax at the closing (i.e., not send it into the IRS but also not give it to the seller), and then wait for the IRS to agree that the seller does not owe the 15% withholding tax. 8288-B withholding certificates are taking three to four months to be processed in 2019. This is a fairly typical wait in any year in our experience. We had feared a longer wait time in 2019, due to the January 2019 government shutdown, but 3 to 4 months is not bad. After the 3 to 4 month wait, escrow can release (in most cases) all or almost all the 15% withholding tax directly to the seller (so it never went into the IRS that way).
Foreign Sellers Having Problems Receiving Withholding Tax Refunds if They Do Not Have a US Bank Account in 2019
Many foreign sellers expect significant refunds of the IRS (15% x gross sales price…assuming an 8288-B was not submitted up front) and (in California) FTB (3.3% x gross sales price) withholding taxes in the year after sale. The easiest way for the foreign investor to receive their refund is for the IRS and FTB to issue the refund via direct deposit into their bank account- but this option is only available if the foreign seller has a US bank account (we find many foreign sellers surprisingly do not have a US bank account). If no US bank account then direct deposit is off the table, and the IRS and FTB will mail a check to the seller (in the seller’s name only) anywhere in the world. Our experience is these checks are generally honored at banks worldwide, but will the check actually arrive to a foreign address? Many times, the checks never arrive at the foreign address (whether that be the fault of the US postal service or the home country postal service). The foreign seller can request a replacement check be sent (it will take months for this to occur), but won’t the reissued check just get lost again? Certainly, a good chance. The lesson here- foreign sellers need to open US bank accounts, or they need to use US addresses on the tax returns (even if the check (in the seller’s name) is being mailed to a US relative or friend).
If the Foreign Sellers are Husband and Wife (or Spouses Generally), They Must Each Have a US Bank Account (or Have a Joint US Bank Account) or They Will Only Receive ½ of their Refund (in Direct Deposit Refund) from the IRS and FTB. Each foreign seller must obtain their own share of the withholding tax refund. This means, for married foreign people selling US real estate, each party must have their own bank account to receive direct deposits refunds from the IRS or California. A bank account solely in husband’s name or solely in wife’s name will only lead to the foreign sellers receiving ½ of their expected refund. Each party must get their own US bank account for direct deposit refunds (which are far preferable than checks), or at least open a joint US bank account.