by Michael Lodge
We have many foreign individuals that purchase real estate in the United States but have questions on the reporting of real estate taxes and how it is paid. Let’s go over the IRS guidelines on the reporting and paying process on US Real Estate taxes.
Two forms are generally used for reporting and paying the tax to the IRS regarding the acquisition of U.S. real property interests.
- Form 8288, U.S. Withholding Tax Return for Dispositions by Foreign Persons of U.S. Real Property Interests
- Form 8288-A, Statement of Withholding on Dispositions by Foreign Persons of U.S. Real Property Interests
Transferees must use Forms 8288 and 8288-A to report and pay to the IRS any tax withheld on the acquisition of U.S. real property interests. These forms must also be used by corporations, partnerships, estates, and trusts that must withhold tax on distributions and other transactions involving U.S. real property interests. You must include the U.S. TIN of both the transferor and transferee on the forms (refer to the “Requirement for Taxpayer Identification Numbers (TIN’s)” section below).
For partnerships disposing of U.S. real property interests, the manner of reporting and paying over the tax withheld is the same as discussed under Reporting and Paying Tax on Partnership Withholding.
For publicly traded trusts and real estate investment trusts, you must use Forms 1042 and 1042-S procedures for reporting and paying over tax withheld on distributions from dispositions of U.S. real property interests. Use Income Codes 24, 25, and 26 on Form 1042-S for transactions involving these entities.
The tax withheld on the acquisition of a U.S. real property interest from a foreign person is reported and paid using Form 8288. Form 8288 also serves as the transmittal form for copies A and B of Form 8288-A, Statement of Withholding on Dispositions by Foreign Persons of U.S. Real Property Interests. Generally, you must file Form 8288 by the 20th day after the date of the transfer.
If an application for a withholding certificate is submitted on Form 8288-B, Application for Withholding Certificate for Dispositions by Foreign Persons of U.S. Real Property Interests, to the IRS before or on the date of a transfer and the application is still pending with the IRS on the date of transfer, the correct withholding tax must be withheld, but does not have to be reported and paid immediately. The amount withheld (or lesser amount as determined by the IRS) must be reported and paid within 20 days following the day on which a copy of the withholding certificate or notice of denial is mailed by the IRS.
If the principal purpose of applying for a withholding certificate is to delay paying over the withheld tax to the IRS, the transferee will be subject to interest and penalties. The interest and penalties will be assessed beginning on the 21st day after the date of transfer and ending on the day the payment is made.
The withholding agent must prepare a Form 8288–A for each person from whom tax has been withheld. Attach copies A and B of Form 8288–A to Form 8288. Keep Copy C for your records.
IRS will stamp Copy B and send it to the person subject to withholding. That person must file a U.S. income tax return and attach the stamped Form 8288–A to receive credit for any tax withheld.
CAUTION! A stamped copy of Form 8288–A will not be provided to the transferor if the transferor’s TIN is not included on that form. In this case, to get credit for the withheld amount, the transferor must attach to its U.S. income tax return substantial evidence of withholding (for example, closing documents) and a statement that contains all the required information shown on Forms 8288 and 8288–A including the transferor’s TIN.
Application for Reduced Rate of Withholding
A reduced rate of withholding may be allowed upon the submission and acceptance of Form 8288-B, Application for Withholding Certificate for Dispositions by Foreign Persons of U.S. Real Property Interests. Refer to Format for Applications for more information. Refer also to Exceptions from FIRPTA withholding.
Requirement for Taxpayer Identification Numbers (TIN’s)
Treasury Decision 9082 (effective November 4, 2003) requires all transferees (buyers) and foreign transferors (sellers) of U.S. real property interests to provide their TIN’s, names and addresses on withholding tax returns, applications for withholding certificates, notice of non-recognition, or elections under sections IRC 897(i) when disposing of a U.S. real property interest.
If the transferor sends Forms 8288 and 8288-A to the IRS for processing but does not list a TIN on the forms and does not attach a Form W-7 ITIN application, the IRS will process the forms, but will not date stamp Form 8288-A “Copy B Mailed” or forward it to the foreign transferor. Instead, the IRS will mail Letter 3794 SC/CG to the foreign transferor, instructing the transferor to apply for an ITIN by filing Form W-7.
Refer to ITIN Guidance for Foreign Property Buyers/Sellers for more information.
Form 1099-S, Proceeds From Real Estate Transactions
Generally, the real estate broker or other person responsible for closing the transaction must report the sale of the property to the IRS using Form 1099-S. For more information about Form 1099-S, refer to the Instructions for Form 1099-S, and the General Instructions for Forms 1099, 1098, 5498, and W-2G.
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