-advertisement -

George Saenz, the Bankrate.com Tax Talk columnist Tax withholding for foreigner's U.S. home

Dear Tax Talk,
I'm buying a home from an individual who is a foreigner. The attorney who is looking at the contract says that I'm responsible to withhold and pay 10 percent of the purchase price of the property to the IRS. He says if I don't do this, I could be held responsible for that 10 percent. I don't want to lose the deal, but I don't want to be on the hook for another 10 percent. What are my options?
-- Henry

Dear Henry,
The IRS is deputizing you as a tax collector. The good news is that whoever the foreigner sells the home to will have the same withholding responsibility, if properly counseled as you are. Of course the seller might not like it, so it is his responsibility to figure out what his tax obligation will be, and if he thinks it is less, he can ask that the 10 percent be reduced.

Since the tax rates on capital gains have been reduced to 15 percent of the gain -- on property held for more than one year, most sellers will owe less than 10 percent of the selling price.

First off, you do not have to withhold if the selling price of the property is $300,000 or less and you will use it as your principal residence. (If you apply for a mortgage, are you checking the owner-occupied box?) If this exception doesn't help, the seller is usually stuck with the withholding. He can ask that the tax withholding be reduced to his actual tax by applying before the closing. He would do this by completing Form 8288-B prior to closing.

While you're technically responsible for the withholding, the title company is generally the intermediary that handles the paperwork. Usually, the title company will hold back the 10 percent and keep it in its escrow account until the IRS answers the seller's application for reduced withholding, which can take 90 days. Nobody ever waits the 90 days to close.

Once the title company hears back from the IRS, it cuts a check to the seller for the excess withholding and pays over to the IRS the actual tax. Form 8288 and 8288-A are sent to the IRS with the correct tax and they are usually issued under your name as the withholding agent. Since the title company has 20 days to send the money to the IRS, you want to make sure that it is done in a timely manner. Otherwise you might get a bill for interest on late payment.

To ask a question on Tax Talk, go to the "Ask the Experts" page, and select "taxes" as the topic.

Bankrate.com's corrections policy-- Posted: March 20, 2007
Read more Tax Adviser columnsAsk a question
Taxes on sale of home owned by foreigner
Foreigners can own homes in U.S.
Taxes on condo for nonresident aliens
June 15 filing deadline for some
Find the tax professional who's right for you
Coming up with tax cash

Compare Rates
30 yr fixed mtg 4.45%
48 month new car loan 3.77%
1 yr CD 0.89%
Rates may include points
Mortgage calculator
See your FICO Score Range -- Free
How much money can you save in your 401(k) plan?
Which is better -- a rebate or special dealer financing?
Rev up your portfolio
with these tips and tricks.
- advertisement -