As a realtor, do you manage any rental properties where the owner is a foreign person? If you do, are you collecting from the GROSS receipts 30% and sending that money to the IRS? If you aren't, you very well may be PERSONALLY and PRIMARILY liable to the IRS for that money, and there is almost no statute of limitations!. I wrote about this in an extensive article in December 2008 (FIRPTA and SHORT SALES - DANGEROUS LIABILITY TO BUYER AND CLOSING AGENT), but now the IRS is reminding real estate agents and property managers of their massive liability for their client's income tax.
With real estate values on rental opportunities at a cyclical low, foreign persons are buying these properties for cash flow and appreciation. IRS Rules on Foreign Persons Receiving Rental Income From U.S. Real Estate issue a strong reminder that,
"Before agreeing to manage U.S. real property for a foreign taxpayer, a real estate professional or rental agent should discuss with the foreign client whether the rental income will be taxed as investment income through withholding, or on a net income basis as " effectively connected with a U.S. trade or business," without withholding (although the owner may have to file estimated tax returns). Rental income from real property located in the United States and the gain from its sale will always be U.S. source income subject to tax in the United States regardless of the foreign investor's personal tax status and regardless of whether the United States has an income treaty with the foreign investor's home country."
Of particular importance to agents dealing with foreign persons is this warning,
"To enforce the system of withholding, the Internal Revenue Code defines a "withholding agent" to be any person in whatever capacity (including lessees and managers of U.S. real property) having the control, receipt, custody, disposal or payment of income that is subject to withholding. Thus, a real property manager who collects rent on behalf of a foreign owner of real property is clearly considered a withholding agent. A withholding agent is personally and primarily liable for any tax that must be withheld. The liability of the withholding agent includes amounts that should have been paid plus interest, penalties and, where applicable, criminal sanctions. The statute of limitations does not start until a withholding return is filed by the withholding agent."
And if a tax return is not timely filed, the gross rent is NOT subject to later adjustment by deducting mortgage interest payments and other usual deductions against rental income.
Needless to say, there is a way to avoid all this withholding obligation and liability. "Foreign individuals and foreign corporations may elect to have their passive rental income taxed as if it were effectively connected with the U.S. trade or business. Once such an election is made by attaching a declaration to a timely filed income tax return, there is no obligation to withhold even in a net-lease situation. Once made, the election may not be revoked without the consent of the IRS. Unless the foreign investor has properly informed the property manager that the rental income is to be treated as "effectively connected income" by submitting to the property manager with a fully completed Internal Revenue Service Forms W-8ECI, Certificate of Foreign Person's Claim for Exemption From Withholding on Income Effectively Connected With the Conduct of a Trade or Business in the United States, the property manager should withhold thirty percent (30 percent) of the gross rental receipts so as to avoid personal liability. A fully completed Form W-8ECI must include a valid U.S. tax identification number for the foreign landlord (in other words, the rental agent must withhold and remit the 30 percent tax to the IRS until this requirement is satisfied).
For further discussion on Foreign Interests In Real Estate, be sure to see the IRS rules on FIRPTA Withholding.
Also see my articles on FIRPTA issues at FIRPTA and SHORT SALES - DANGEROUS LIABILITY TO BUYER AND CLOSING AGENT and SHORT SALE AND FIRPTA TAX WITHHOLDING - IRS ISSUES PRIVATE GUIDANCE
Copyright 2011 Richard P. Zaretsky, Esq.
Be sure to contact your own attorney for your state laws, and always consult your own attorney on any legal decision you need to make. This article is for information purposes and is not specific advice to any one reader.
Richard Zaretsky, Esq., RICHARD P. ZARETSKY P.A. ATTORNEYS AT LAW, 1655 PALM BEACH LAKES BLVD, SUITE 900, WEST PALM BEACH, FLORIDA 33401, PHONE 561 689 6660 RPZ99@Florida-Counsel.com - FLORIDA BAR BOARD CERTIFIED IN REAL ESTATE LAW - We assist Brokers and Sellers with Short Sales and Modifications and Consult with Brokers and Sellers Nationwide! Shortsales@Florida-Counsel.com New Website www.Florida-Counsel.com.
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