Real Estate Attorney with THE ZARETSKY LAW GROUP - Board Certified Real Estate Atty and AUTOMATED LAND TITLE COMPANY

 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.



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  - 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!   New Website


Comments (34)

Marte Cliff
Marte Cliff Copywriting - Priest River, ID
Your real estate writer

This is scary stuff for rental managers. What they don't know WILL hurt them!

Jun 18, 2011 11:59 AM
Jim Gilbert
Samson Properties - Fairfax, VA
The Gold Homes Team

What an informative post!  I almost managed a property for a foreign investor once.  Phew!

Jun 18, 2011 12:06 PM
Allen 2222
Austin, TX

I think it is crzy to turn everyone into mini-IRS agents. We should not  be other people's keepers in this manner.

Jun 18, 2011 12:08 PM
Richard Zaretsky
THE ZARETSKY LAW GROUP - Board Certified Real Estate Atty and AUTOMATED LAND TITLE COMPANY - West Palm Beach, FL
Florida Real Estate Attorney

Agents should not be afraid to manage a foreign person property - provided they have the right information and clearances beforehand.   Be sure to have a competent accountant or lawyer get the right IRS filings beforehand and with that receipt you should be OK to manage the proprety without risk of the penalties or liabilities mentioned in this article.

Jun 18, 2011 12:14 PM
Ruby Lee Sweeting
Darville Wong Associates Realty Bahamas
Your Bahamas Agent for Relocations & Second Homes

Richard, does this withholding obligation and liability (as it relates to U.S. Law) have any application in the case of managing a rental property located in The Bahamas for a U.S. citizen?   

Congratulation on your "MEMBER SPOTLIGHT".  Thanks for this post.

(Nassau/Paradise Island - Bahamas)

Jun 18, 2011 12:35 PM
Greg Nino
RE/MAX Compass - Houston, TX
Houston, Texas


Very good post and definitely feature worthy. Very interesting rules of the road; thanks so much for sharing.

Jun 18, 2011 04:30 PM
Richard Zaretsky
THE ZARETSKY LAW GROUP - Board Certified Real Estate Atty and AUTOMATED LAND TITLE COMPANY - West Palm Beach, FL
Florida Real Estate Attorney

Ruby #20

My response would be no, as this rule relates to income from a US trade or business.  Bahama business operations income is typically not US trade or business income.  Also there may be rules that don't even trigger US tax if the Bahama income is not removed from that country.

A tax professional familiar with interenational income situations is needed to sort out the entire effect upon your client.

Jun 18, 2011 05:22 PM
Adam Mallory
eBroker Real Estate 619-566-ADAM - San Diego, CA
Broker, ABR, e-Pro

Excellent post Richard!  Perhaps a very good reason not to get into property management.  Too much additional liability.

Jun 18, 2011 05:43 PM
Cristina Salcedo
US Home Lending - Riverside, CA
Riverside, Loan Specialist

Great post Richard!  Excellent advice on having the right information and clearances beforehand.

Jun 18, 2011 09:40 PM
Kate Akerly
Kaminsky Group - Manhattan Beach, CA
Manhattan Beach Residential Sales

Great post.  There are many rental properties in NYC that are managed by the agent that sold the property the buyer, as opposed to a major property management firm.  I'm sure few of them are aware of their obligations and the potential liability they are taking on.

Jun 19, 2011 02:37 AM
Sylvia Jonathan
Coldwell Banker Platinum Properties - Irvine, CA
Broker Associate, SFR


In this situation, does it apply to a green card holder who is currently residing abroad but is temporarily leasing his home out?

Jun 19, 2011 03:35 AM
Richard Zaretsky
THE ZARETSKY LAW GROUP - Board Certified Real Estate Atty and AUTOMATED LAND TITLE COMPANY - West Palm Beach, FL
Florida Real Estate Attorney

Sylvia - the answer on out of country green card holder is addressed on the IRS circular,,id=96392,00.html

Jun 20, 2011 01:23 AM
Gary L. Waters Broker Associate, Bucci Realty
Bucci Realty, Inc. - Melbourne, FL
Eighteen Years Experience in Brevard County

Interesting. This is exactly one reason why a real estate agent should not try to do all things....details!

Jun 20, 2011 01:32 AM
Gene Riemenschneider
Home Point Real Estate - Brentwood, CA
Turning Houses into Homes

Well that is scary.  Just another reason I am glad I do not do property management. 

Jun 20, 2011 04:55 AM
Gerard Gilbers
Higher Authority Markeing - Asheboro, NC
Your Marketing Master

I with Gene! Great information, but I'm glad I don't do property management.

Jun 21, 2011 06:58 PM
Robert Savage
Bakersfield Property Solutions - Bakersfield, CA
Bakersfield Short Sales, Property Management, Cash

Allow  me to say that you are right on the money and this is infuriating. It might be more palatable if the IRS paid me to collect money on their behalf but to interfere in my business and not compensate me is very frustrating. Why not assign the responsibility to the tenant who is paying the rent. Of course that doesn't make any sense but neither does requiring me to do it.

Jun 21, 2011 07:58 PM
Richard Riley
RE/MAX Properties SW - Orlando, FL

Another excellent post, Richard.  It makes me pleased not to be involved in property management.  It also provides one more reason why the Fair Tax should be implemented to replace the cumbersome and overly burdening IRS.

Jun 22, 2011 03:22 AM
Cyd Weeks Real Estate Corp - Palm Coast, FL
Realtor Palm Coast, Fl

Ok, let me get this straight.  I have two foreign owners...both have ss#'s and have given me the form for that, just as I get from the US citizen owners.   In addition to that I have to have this other form filled out also?  I've been filing the required 1099 for each of them at the end of the year.  I still have to have this other form?   *sigh*   

Jul 04, 2011 12:39 AM
Richard Zaretsky
THE ZARETSKY LAW GROUP - Board Certified Real Estate Atty and AUTOMATED LAND TITLE COMPANY - West Palm Beach, FL
Florida Real Estate Attorney

Cyd - that is right!  IF they fall into the definition of a "foreign person".  Watch for my update to this article likely today on using that "form" and solving the problem.

Jul 04, 2011 02:58 AM
Cyd Weeks Real Estate Corp - Palm Coast, FL
Realtor Palm Coast, Fl

I'll be watching!  And I'll be sharing with the property managers in Flagler via the property management committee.   

Jul 04, 2011 03:36 AM