The IRS stipulates that non-U.S. citizens and resident home sellers are required to pay 15% of the home price as a withholding tax when they sell their homes. But we know that withholding tax is not a tax to be paid, it is better to think of it as a security deposit to ensure that foreign sellers will pay this tax (because the IRS does not believe that Chinese sellers living in Shanghai will mail a tax payment check to the Internal Revenue Service).

Example: In 2014, Chinese nationals/residents Cindy and Jimmy purchased a $1 million property in Los Angeles. In January 2019, they sold for 1.2 million. The withholding tax is 180,000 (1.2 million X 15% = 180,000). But the actual income tax they have to pay is about 30,000 because the IRS usually collects 15% of the appreciation of the home (200,000 X 15% = 30,000). Although only 30,000 in actual income tax is owed, the escrow company is required to hand over 180,000 to the IRS when closing the transaction. Cindy and Jimmy will have a tax refund of $150,000, but when will they receive it?

There are several options for the timeline for obtaining excess withholding tax:

  1. Normal Tax Refund Timeline – Foreign home sellers can file a tax return the following year after the home is sold, but there are several steps to filing (applying to the IRS for a tax refund is not easy, the process is a lot more complicated than you might think). But assuming home sellers (like our example above Cindy and Jimmy) have gone through each step successfully, they will receive their tax refund in the second year after the sale (like in our example above July 2020). Even with this long wait (18 months after the buyer’s deal closed), Cindy and Jimmy were lucky to receive their tax refund.
  2. 8288-B Option: Fastest Tax Refund Application – Foreign home sellers can apply for 8288-B fast tax refund (or fast approval) through experienced tax experts such as DIRECTS (as in our example above to prove to the IRS that the house is Profit of 200,000, so only 30,000 income tax is owed, but the IRS owes the seller 150,000 tax rebate). With the right application (again, there are several complicated application processes that foreign home sellers need to go through, which is not easy), home sellers can receive their tax refund 4 months after the sale (wait until about May 2019… Through the 8288-B process and with a certificate of approval for a withholding tax refund, Cindy and Jimmy received a tax refund of $150,000 more than a year before they passed their normal tax refund)
  3. Be careful – many foreign home sellers never receive their tax refund – many foreign home sellers do not receive their tax refund. Again, there are a lot of steps that need to be done right for foreign home sellers who want to receive their tax refund. If the seller does not file properly, the IRS will withhold the excess withholding tax. It’s hard to say what percentage of foreign home sellers never receive their excess withholding tax refund, but there is a significant percentage of foreign home sellers who never receive their tax refund. Therefore, a professional tax team like DIRECTS is crucial to help foreign home sellers successfully receive a full withholding tax refund and become a winner.
  4. Foreign home sellers have about 3 to 4 years after the sale to successfully recover their tax rebates, so it is still possible to recover tax rebates on sales in previous years. If the sale we listed above happened in 2018 instead of 2019, foreign home sellers can still get their tax refunds back. But longer-term the IRS Restriction Act would prevent foreign home sellers from receiving any tax refunds. So foreign home sellers have more than a year after the home is sold to claim a tax refund, they can claim a refund of the withholding tax they cannot get back on the house sold in previous years (again, they need a lot of expert help, e.g. through DIRECTS to IRS filing a withholding tax refund request).

ITINs U.S. Taxpayer Identification Number

Foreign home sellers must apply for ITINs (US Taxpayer Identification Numbers). If a non-US citizen, the resident home seller does not have an ITIN, they will never be able to get any 15% withholding tax refund. Foreign home sellers need a professional tax team to assist in applying for an ITIN (DIRECTS can of course provide this service). In the ITIN application, foreign home sellers must submit several documents, an IRS application form, and more importantly, a certified passport issued by the home country of the seller. Home sellers can authenticate their passports in the following ways:

  1. The U.S. consulate in the country where the seller’s passport was issued;
  2. If not a US citizen, the resident seller agrees to send the passport by FedEx to any of DIRECTS’ offices (Arcadia, Irvine, or Palm Desert), and DIRECTS can notarize the passport. After receiving the passport, DIRECTS will conduct a video conference with the foreign seller through WeChat or Skype to notarize the passport. After the meeting, we will send the passport back to the seller immediately by FedEx. DIRECTS is an agency authorized by the IRS to notarize passports, so foreign home sellers can avoid trips to the U.S. consulate if they prefer to FedEx passports to any of our offices in California;
  3. If the foreign seller is in the United States, they can bring their passport in person to our offices in Arcadia, Irvine, or Palm Desert for passport notarization.

The fastest time a foreign home seller can submit an ITIN application is after signing the home sales agreement. If they have sold their home but need to apply for an ITIN for a tax refund, they can submit an ITIN application immediately. Please contact DIRECTS regarding the specific ITIN application process.

Withholding tax requirements for non-U.S. citizens, residents of rental income from U.S.-owned real estate

The IRS stipulates that non-U.S. citizens and resident homeowners pay 30% of their monthly rent to the IRS as a withholding tax when renting out their properties. Example: A foreigner buys a house in Irvine, California, and rents it to a tenant for $2,000 per month, but the $600 of the $2,000 in rent that should belong to the owner must be paid directly to the IRS as rent withholding tax. Who is responsible for sending the 30% rental withholding tax to the IRS? Foreign homeowners, U.S. property management companies (or anyone else that helps foreign homeowners collect rent), and even tenants are also obligated to pay the 30% rent withholding tax to the IRS. If the IRS fails to expect to receive the 30% rent withholding tax, this can lead to the seizure of the foreign homeowner’s house and even affect future immigration plans.

But non-citizen homeowners can easily default on the 30% withholding tax

Non-citizen homeowners who rent out their properties for rental income can easily fail to meet their 30% withholding tax obligations. How to do it? Foreign homeowners must legally fail to comply with the 30% withholding tax obligation following the following procedures:

  1. Foreign homeowners must file their taxes the following year the property is rented out. Homeowners must declare rental income and pay tax (if tax is required). But do they need to pay any taxes? In many cases, the answer is no! Foreign homeowners only need to declare their net rental income when filing their tax returns, which means that many items can be deducted (including loan interest charges, advertising costs, cleaning fees, property management fees, and various other expenses). The result is that foreign homeowners pay no or very little tax at all. In our example above, a foreign homeowner who purchased a house in Irvine received a monthly rent of $2,000. After correct tax filing, the foreign homeowner does not have to pay tax and is legally exempt from the 30% rent withholding tax.
  2. Foreign homeowners must obtain a U.S. Taxpayer Identification Number (ITIN) if they have not previously applied for it.
  3. Finally, the foreign homeowner must complete the W-8ECI application form from the Internal Revenue Service. If the foreign homeowner does not have an ITIN, the W8-ECI application form cannot be submitted. The W-8ECI needs to be resubmitted every three years.

By applying for an ITIN and submitting a W-8ECI application, a foreign homeowner who rents out an Irvine home for $2,000 a month has effectively reached an agreement with the IRS: If the foreign homeowner files annual tax returns for U.S. rental income, the IRS exempts the foreign homeowner Obligation for 30% rental withholding tax. Therefore, foreign homeowners do not have to pay the 30% rent withholding tax, but the premise is that they must file a tax return. After foreign homeowners have applied for tax deductions (including, for example, loan interest charges, property management fees, maintenance fees, etc.). It is very likely (and very common) that foreign homeowners end up paying no taxes.

DIRECTS helps foreign homeowners and property management companies representing foreign homeowners apply for ITINs and file rental income tax returns.

By Cary Grant

Cary Grant, the enigmatic wordsmith hailing from the UK, is a literary maestro known for unraveling the intricacies of life's myriad questions. With a flair for delving into countless niches, Grant captivates readers with his insightful perspectives on issues that resonate with millions. His prose, a symphony of wit and wisdom, transcends boundaries, offering a unique lens into the diverse tapestry of human curiosity. Whether exploring the complexities of culture, unraveling philosophical conundrums, or addressing the everyday mysteries that perplex us all, Cary Grant's literary prowess transforms the ordinary into extraordinary, making him a beacon of intellectual exploration.

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