By Michael W. Brooks, Esq.
At DIRECTS (Domestic and International Real Estate Closing Tax Services, Inc.), all day, every day, we work on tax matters relating to FIRPTA (the Foreign Investment in Real Property Tax Act). We work for clients from throughout the world who invest in real estate throughout the United States, but most of our clients own (or owned) real estate in California, and some of our clients are owed tax refunds from the IRS from real estate sales years which took place several years ago.
Let’s say we have a British investor who purchased Los Angeles real estate (a house) in 2010 for $2,500,000, and in November 2015, the British investor sold the LA house for $2,000,000 (not a great investment…he lost $500,000). Recall that under FIRPTA 15% of the gross sales price must be sent into the IRS at closing (Nov 2015). It doesn’t matter that our British investor is selling for a significant loss, the British seller’s escrow company (escrow companies are used in California) overseeing his transaction must send in $300,000 to the IRS at closing (15% of the $2M sales price at close). Since the British investor sold for a loss, he is entitled to a full refund of $300,000 sent into the IRS. But if it’s one thing we like to stress on the DIRECTS FIRPTA Tax Blog and on the DIRECTS website generally- obtaining a refund of the FIRPTA withholding tax sent into the IRS is not easy. There are several hurdles to overcome to obtain FIRPTA refunds, and that is why it so common that we at DIRECTS are contacted by people from countries throughout the world selling US/ California real estate (such as Canadians selling a Palm Springs vacation house, Saudis selling Newport Beach real estate, Chinese selling homes purchased for their children to attend school in Irvine…even the odd real estate sale in Pennsylvania). At DIRECTS, we can help non-US sellers obtain their refunds of withholding taxes from sales years ago.
How Does DIRECTS Obtain These Old Refunds/ How Long May the Foreign Individual Still Obtain a Refund?
The statute of limitations under the Internal Revenue Code permits the foreign investor generally around 4 years from the time the foreign person sold the real estate (3 years the year the tax return was due to report the sale, which is the calendar year after the sale) to properly apply for the refund. In our British investor’s case, his tax return (to claim his $300,000 FIRPTA withholding tax refund from the sale) was generally due in 2016 (the year after the 2015). In his case he still should be able to obtain a refund if he properly submits his tax return in 2019 (by June 15 2019, probably to be safe). So even now, in November 2018, the British investor who sold the LA property in Nov. 2015 and had the $300,000 withheld from him then could contact DIRECTS in our Arcadia office (at 626-684-0428), or email us at email@example.com, (or contact us at our Palm Deseret or Irvine office for that matter), and get this massive refund.
Obtaining an IRS refund from the FIRPTA tax withholding from a real estate sale years ago is a bit like putting together the pieces of a puzzle and showing the finished puzzle properly to the IRS. The pieces include a seller’s valid ITIN or US social security number; proving to the IRS they actually possesses the British investor’s $300,000 (withheld in 2015)…this step is not easy;proving our client (the British investor) is in fact, entitled to a refund of the full $300,000 the IRS possess in “the file” of the British investor; and finally, getting the IRS to mail the darn check!. This can require plenty of tax filings; tax applications; and many, many, many phone calls follow up letters to the IRS, but we can and do obtain refunds of the withholding tax from sales from years ago.
At DIRECTS, we can rescue your FIRPTA withholding tax which was held by the IRS for years, which you probably thought was gone for good.
A Couple Last Thoughts
1) USE the 8288-B- do not let the FIRPTA withholding tax ever go into the IRS in the first place! If you are a foreign seller, do not let the IRS ever possess your FIRPTA withholding tax if you can avoid it. Call DIRECTS, and utilize the Form 8288-B withholding certificate process (see our website at www.directsinternationaltax.com for an 8288-B discussion or look further on this FIRPTA Tax Blog). The 8288-B would have allowed the escrow company to hold the British seller’s $300,000 in a trust account while DIRECTS applied to the IRS for a “withholding certificate”, which ultimately would have let the escrow company distribute the $300,000 back to the British seller about four months after sale…he would have had his $300,000 back in Feb 2016, and it never would have gone into the IRS in the first place! Do the 8288-B- do not let the withholding tax ever go into the IRS!
2) Lastly, what if in our example above, the British individual purched the property in 2010 for $2.5M and then sold it in Nov 2015 for $3M (a $500,000 gain this time, not a $500,000 loss), and we assume (after realtor fees and escrow fees and our fees and the cost of a new air conditioner put into the house, etc.) his net profit on the sale was $200,000. Here our British investor did actually owe the IRS a little tax on the sale (maybe $30,000 in capital gains tax owed…$200,000 gain x 15% capital gains rate =$30,000.) So in that case, DIRECTS would be working hard to obtain a refund of $270,000 of the $300,000 sent into the IRS, not the full $300,000. He made some profit on the sale, so he did owe the IRS a little tax, but was he still entitled to a huge refund. And by working with DIRECTS, he can get it!