More steps for Bermudians selling US property
This is part two of the Pondstraddler Life Financial Planning Series looking at Bermudian owners of US real estate who want to sell, and want to know what the ramifications of doing so are. The first part was published last month, and a link to that can be found at the end of today's article. Readers, please note, the disclosure at the end of this article, which is specific to the answers given.
As a recap, a reader asked: “About ten years ago, we purchased a vacation house in the United States. We want to sell the property as the older we get, the harder it is to manage the long-distance maintenance. We are Bermudian/UK nationals resident in Bermuda for many years.
“Any information you can provide to help us understand the process with American tax authorities, eg withholding tax, ITIN numbers, etc?”
We presented the first two steps in the first article. We now reach the third step.
Step three: the process.
Here is where all that tedious paperwork comes into the picture.
• The seller foreign person (transferor) cannot finalise the real estate deal (and obtain the proceeds) without obtaining an Individual Taxpayer Identification Number. Imagine sending personal information and a cash payment with no identification except your name to US IRS to be sorted along with the many millions of other daily transactions?
This ITIN requirement also becomes an issue when a Bermudian resident inherits from a US estate. In some cases, the Bermudian beneficiary was actually determined to be an “accidental American”. That is a topic for another day, readers.
• The buyer/transferee must remit the withholding tax to US IRS. The buyer, advised of the no withholding due exception, cannot just take the foreign person's word that the property is being sold at breakeven or a loss.
• All parts of the transaction are correlated with the filing of variously specific to this type of transaction US IRS forms.
• State withholding tax. Many states in the US may also require withholding on foreign national sales of US real property as well as filing a state return, such as the state of Georgia.
• Recognition of rental income, depreciation recapture, and the like. Foreign property owners who utilise their US property as a rental investment may have additional US IRS federal tax filing requirements.
Space does not allow the exploration of the last two items.
ITIN guidance for foreign buyers/sellers of US property
US IRS requires all transferees (buyers) and foreign transferors (sellers) of US real property interests to provide their ITINs, names and addresses on withholding tax returns, applications for withholding certificates, notice of non-recognition, or other elections under IRC sections 897(i) when disposing of a US real property interest.
Obtaining an ITIN
Application for IRS individual taxpayer identification number is made on Form W-7, generally, for real estate transactions under the No 4 category labelled dispositions by a foreign person of US real property interest — third-party withholding.
The foreign individual is required to submit original documents, such as a foreign passport, driver's licence, civil birth certificate, etc, with the W-7 applications.
Valuable identification documents do get lost. It is not recommended to send originals of anything that is difficult to replace to US IRS. The foreign applicant, residing outside the United States, can use the services of a Certifying Acceptance Agent, who can verify original documentation and certify copies of the documentation. Processing time for this application, once submitted to the IRS varies up to seven weeks.
You may be able to have original documents certified at the US Consulate in Bermuda, per IRS instructions note at the W-7 link.
Local “Big Four” accounting firms in Bermuda can also provide assistance.
Instructions for Form W-7 (11/2018), visit: https://tinyurl.com/y2h7ol6k
The buyer/agent/settlement officer transferee withholds tax and remits it to the Internal Revenue Service on
• Form 8288, US Withholding Tax Return for Dispositions by Foreign Persons of US Real Property Interest, and https://tinyurl.com/yycd8x8n
• Form 8288-A, Statement of Withholding on Dispositions by Foreign Persons of US Real Property Interests (FIRPTA). Link at: https://tinyurl.com/y64p2dpm
No withholding required. The real estate sale is a capital loss
Naturally, paperwork and filings must be made in order to receive an authentic withholding certificate exempting the transaction from US IRS withholding, prior to the closing. Link at: https://tinyurl.com/yyufrwbd
What happens when tax is withheld because the individual does not have time to file for a withholding certificate, or realises, belated, that an incorrect computation indicates that the withheld amount should be reduced, or the sale is a dead loss?
The foreign individual(s) can have a specific tax return (1040-NR. Link at: https://tinyurl.com/y52x44qo, or other tax form depending upon entity) prepared and filed to obtain a refund from the IRS of all unnecessary tax paid. They must use the ITIN(s) assigned, and attach the date stamped Form 8288-A (from the transferor) to the tax return as evidence of FIRPTA withholding.
Readers, this is complicated and the entire process takes time. There are definitely more bits, pieces, IRS timely filing imperatives, exceptions and possible changes to US tax law that may affect a real property sale, but are way too lengthy and detailed for this narrative.
As a last caveat, and I'm sure you've already guessed what I am going to emphatically state: start your planning early.
Do not even contemplate doing this yourself to save on expenses. You are dealing with huge bureaucratic short-staffed organisation that handles more than 250 million tax returns every year, along with millions more related items. Your documentation can (and has — tax professionals validated) get lost in the shuffle, leading to endless delays, frustration, and possibly torpedo your property sale.
• Hire a licensed real estate attorney who is experienced in handling legal transactions for international foreign buyers and sellers of US real property.
• Never ever consider sending any of your original documents to US Internal Revenue Service in order to file for an ITIN, or related items.
• Further, do not submit any paperwork, payments or US tax returns (if required) to US Internal Revenue Service without an ITIN and having an experienced US CPA (Certified Public Accountant) tax practitioner review your full situation and prepare all of the appropriate tax documents.
• Part one of this series was published on February 23, and can be found at https://tinyurl.com/yxr4orxf
• IRS guidance. Visit: https://www.irs.gov/individuals/international-taxpayers/itin-guidance-for-foreign-property-buyers-sellers
Disclosure: This article is for general information purposes only and cannot be taken as legal, tax, immigration, financial or any other personal financial-planning advice. The situation discussed in the two-part series is a composite case illustration of a very generic problem for Bermuda residents owning/investing abroad in any country that assesses taxes on real property bought or sold by foreign nationals.
Readers have requested information relative to Canadian and UK real estate invested in or owned by Bermuda residents, these will be considered for future Pondstraddler Life articles.
• Martha Harris Myron CPA CFP JSM: Masters of Law — international tax and financial services. Dual citizen: Bermudian/US. Pondstraddler Life, financial perspectives for Bermuda islanders and their globally mobile connections on the Great Atlantic Pond. Finance columnist to The Royal Gazette, Bermuda. All proceeds earned from this column go to The Reading Clinic. Contact: firstname.lastname@example.org