FIRPTA Tax Blog
By Michael W. Brooks, Esq. (President DIRECTS)
In January 2017, the IRS suspended the right of privately licensed tax professionals and companies (such as my firm- DIRECTS) to certify non-US passports, which slowed down significantly the time it took for a non-US person who sold US real estate to obtain an ITIN (an Individual Taxpayer ID Number) in connection with their real estate sale, and therefore slowed down significantly the time it took for non-US persons to obtain a refund of the mandatory (up-front at the time of sale of US real estate) IRS withholding tax. By the end of 2017, the IRS had reinstated the right to private certifying acceptance agents to certify passports, but a lot of damage had already been done.
Recall the Basic Rules of FIRPTA, and What the Goal of the Foreign Seller is with Respect to FIRPTA- Get the Big Refund!
Recall when a non-US person or entity sells US real estate, and when the sales price is over $300,000, the IRS will generally require the escrow company (in California escrow companies are used as the intermediary) to withhold 15% of the real estate’s gross sales price, and (usually) send that amount into the IRS at closing. Recall, however, that this withholding tax is only temporary, and the non-US seller (e.g., the Russian seller of real estate in Los Angeles, the Chinese seller of real estate in Irvine, the Canadian seller of real estate in Palm Springs) will likely obtain a refund (of either all or most of the withholding tax), assuming they take the proper refund steps. The only question is when will the refund come.
Take the specific example of a German individual who in 2015 purchased a Los Angeles home for $800,000, and in March 2018, sold it for $1,000,000. Under the IRS rules (the FIRPTA rules), the escrow company handling the transaction would be required to withhold $150,000 (15% multiplied by the $1,000,000 sales price), and send that amount into the IRS. Because the German individual is selling for a $200,000 profit (and that’s without deducting for their realtor fees and other allowable deductions…so their profit is undoubtedly much lower), the most tax they might owe the IRS is maybe $30,000 (15% (capital gains rate) x profit of $30,000), so the German seller of US real estate in Los Angeles is entitled to a refund from the IRS of at least $120,000. But how will our German seller of a Los Angeles home obtain a refund of his refund from the IRS? One thing he must do to obtain his refund is first obtain the ITIN, and that can be so tricky. No ITIN (or US social security number) for our German seller- no refund… ever.
The Foreign Seller of US Real Estate Must Successfully Obtain an ITIN if They Ever Wish to Receive a Refund. Obtaining ITIN’s is not Easy. A Certified Copy of the Foreign Individual’s Passport is a Required Element of a Successful ITIN Application.
All non-US sellers (including the German seller in our example) must obtain a US individual taxpayer ID number (an “ITIN”), if they ever wish to receive a refund of their 15% withholding tax (minus the tax on the gain on the sale, $30,000 (at most) in our example). A required component of the ITIN application is a “certified” copy of the foreign seller’s passport (our German seller won’t want to send his real German passport into the IRS as part of the ITIN application, so he is allowed to send in a certified copy instead). But where can one obtain a certified copy of their passport? They can either: (a) go the US Embassy or Consulate in their home country (Germany in this case), but a visit to any US Embassy does not sound fun: (b) go their home country consulate (the German Consulate) in the US (this presumes the foreign seller is in the US and there is a (German) consulate in the US location where the foreign seller is visiting); (c) go to an IRS office (a terrible choice when applying for an ITIN in conjunction with a FIRPTA (withholding on US real estate sale) scenario…the IRS office option is very unlikely work); or (d) (the best option) utilizing private certifying acceptance agents (lawyers, accountants or other tax professionals), who are trained and approved by the IRS not only to certify the passport, but also know how to properly prepare the entire ITIN application which will include a certified copy of the foreign person’s passport (such as DIRECTS). Certify Acceptance Agents are by far the best way to ensure foreign sellers obtain certified copies of their passports, ITIN’s, and ultimately their withholding tax refunds. But for a good portion of 2017, Certify Acceptance Agents were not allowed to certify passports of foreign sellers. Although Certify Acceptance Agents can again certify passports (discussed in Part 2), the “blackout” had 2017 significant ramifications. More on that in Part 2….