Tom Kelly: Foreigners take part in an increasing number of deals

Sales of homes to and by foreigners or foreign property has become a popular topic in many neighborhoods and college towns. Often, discussions include “an all-cash Asian buyer looking for an investment in the States” or “some eastern European who’s only going to use the place a couple of months out of the year.”

Given the popularity of United States property to people of other countries, the discussion does not come as a complete surprise.

But what about when the foreigner is a seller. Recently, the seller of a property, a resident of Dublin, Ireland, did not receive all of his net price. The escrow company withheld 10 percent of the sales proceeds and earmarked it for the Internal Revenue Service.

According to a real estate agent involved in the deal, it was never really explained to the seller that the tax rules change when the seller is not a U.S. citizen.

Rob Keasal, real estate specialist in the accounting firm of Peterson Sullivan, said since the buyer has the cash, he or she is obligated to withhold some of the amount given to the seller and remit it to the IRS as an advance on the seller’s tax liability.

“The 10 percent withholding satisfies all parties’ obligations to the IRS,” Keasal said. “The U.S. buyer or escrow agent have no further obligation to the IRS. Since the tax is withheld from the seller’s funds, there would be no reimbursement to the buyer. Escrow companies usually require a statement of non-foreign status from the seller to prove that withholding is not required.”

For example, if a foreign seller sells a property for $100,000, the buyer is required to withhold 10 percent or $10,000 and only give the seller $90,000. The $10,000 is sent to the IRS as an advance on the seller’s tax obligation. The seller can file a return and get some of the money refunded if their tax liability is less than the withholding.

Keasal pointed out that not all sales transactions are handled through professional escrow, putting more responsibility on the buyer’s shoulders when dealing with a foreign seller.

And, don’t be surprised if you hear more conversations regarding real estate and off-shore buyers and sellers. According to the Association of Foreign Investors in Real Estate, American cities were named four of the top five spots in the world for foreign property investors. London claimed this year’s top pick as the best city in the world for foreign property investors.

Last year’s top pick, New York, came in second in this year’s survey followed by San Francisco, Houston and Los Angeles. According to the association, the U.S. kept its position as the most “stable and secure” country overall for foreign investors. The U.S. was more than 50 percentage points ahead of Germany, which came in second place in the “stable and secure” category.

“Foreign investors’ continued interest in the U.S. real estate markets reflects fully functioning capital markets that provide access to a broad range of investment opportunities,” said Steve Hason, chairman of the Association of Foreign Investors in Real Estate.

The second foreign transaction discussed involved the capital gains tax on a view property in Mexico. The seller said he had gotten away with a steal of a deal by hiring an astute Mexican attorney.

How capital gains liability is calculated on the sale of property in Mexico is different than in the U.S. Mexican capital gains involve a complex calculation that goes beyond cost basis and selling price. In a nutshell, it includes an adjustment for inflation and is usually tied to the appraised value or the local municipal assessed value, similar to our county tax assessment. The next result is that the seller often pays substantially less in capital gains tax in Mexico than in the U.S.

If you are involved with any investment property sale, take time to do the research on the tax liability. A portion of the proceeds of some deals may be withheld, or sent elsewhere, to cover the tax.