The tax people always try and find a way to have others do their job for them. And, they know that the person responsible for paying taxes isn't usually going to be the easiest to corral. So, here's what they did as regards taxes a foreign person would owe on real estate that they sell in the U.S.:
- The BUYER is responsible for making sure that the seller pays their taxes.
- The buyer must execute, or have executed, the proper forms that include the Seller's social security number.
- 10% of the proceeds of a sale (defined as the gross selling price) must be withheld and sent to the IRS if the seller is a foreign entity without a U.S. Social Security Number.
- If the buyer doesn't do what they are tasked to do, and the seller is a foreign entity who leaves without paying their taxes, that 10% will be taken from the buyer.
No, it isn't a fair way to do it. But, it's the law, and real estate agents who don't facilitate getting things done properly can be fined up to the amount of their commission. Even worse, they'll still be meeting that buyer from time to time around town, and they won't be pleasant. I have been unable to find any federal forms for how to handle this, but my state of New Mexico real estate association has developed forms and purchase agreement language that gets the job done. Check your state and association to see what's available. Here's how it should work:
- Some provision in the purchase contract requiring the seller to prove whether a foreign owner or not. We use a box requiring an affidavit with their social security number.
- A statement in the agreement that, absent that affidavit and SSN, 10% will be withheld and sent to the IRS, facilitated by the title company. (BUT buyer's responsibility to see that it gets done.)
- Because none of us wants to hold anything with someone's social security number, there's a way to have the title company do this. The seller gives the affidavit with SSN to the title company, and they execute a QSS, Qualified Substitute Statement. This states that the title company will substitute for the buyer in holding the affidavit. The buyer gets a copy, and the brokers.
If the seller provides a false social security number, supposedly it's not the problem of the buyer, who tried to comply and has no duty to verify it. Let's hope that is true and remains the law. Are there any exceptions? One for sure exists. If the buyer is buying a home for their personal residence, and the price is $300,000 or lower, it is an exempt transaction. Brokers should have an affidavit from the buyer that it is to be their primary residence.
