Steps for Bermudians selling a US property
This is part one of the Pondstraddler Life Financial Planning Series looking at the ramifications for Bermudian owners of US real estate who want to sell.
A reader writes: About ten years ago, we purchased a vacation house in the United States. We want to sell the property as the older we get the harder it is to manage the long-distance maintenance. We are Bermudian/UK nationals resident in Bermuda for many years.
Any information you can provide to help us understand process with American tax authorities, eg withholding tax, ITIN numbers, etc?
Before proceeding with an answer, readers please note the disclosure at the end of this article.
Today, we address the individual (not a business entity) foreign national owning real property in the US.
Step one. We will start with our “foreign owner of US real property” question checklist:
1. When was property purchased?
2. In what US state is it situated?
3. How was property ownership titled?
4. Was rental income earned from this property? If so, has the foreign owner reported and filed US federal tax returns (and state tax returns, if required) to declare tax liability for said property?
5. What was the property’s original cost? Calculate the purchase price plus settlement fees?
6. Were capital improvements made to property? List the total of all, eg new roof, room addition, outside deck, new windows, etc
7. Estimate the expected sales price at market today.
8. Calculate the profit, or loss, on the proposed sale.
9. How long has the owner(s) stayed in the US on each visit? Note, not necessarily at the property.
Use the substantial presence test calculator to ascertain that you have not overstayed in the United States. Overstays will deem a foreign person to be considered a US tax resident subject to certain other US tax obligations. For more information, visit https://tinyurl.com/yadwddht
Step two. Understanding United States tax law relative to the foreign owner’s contemplated property sale.
Putting a US property on the real estate market is the easy part. The more complex event, if and when you sell your US house, is the closing sale transaction documentation requirements.
US tax law under the Foreign Investment in Real Property Tax Act of 1980, states that tax is generally imposed on the disposition of any US real property interest, which includes real estate owned directly by foreign persons, as well as shares owned by a foreign person in a US corporation that owns substantial US real estate (referred to as a US real property holding corporation).
A disposition means “disposition” for any purpose of the Internal Revenue Code. This includes, but is not limited to, a sale or exchange, liquidation, redemption, gift, transfers, etc.
Uncle Sam does not care about the outcome on your US property investment. The FIRPTA withholding tax assures that the foreign person cannot transfer their gross sale proceeds out-of-country without paying a tax, regardless of a capital gain or loss on the sale.
Transferees and transferors. Persons purchasing US real property interests, certain purchasers’ agents, and settlement officers are considered transferees, who are required to withhold certain amounts, depending upon the transaction and entity, eg 10 per cent or 15 per cent of the proceeds realised on the disposition from the foreign persons (transferors).
The amount realised is the sum of:
• The cash paid, or to be paid (principal only);
• The fair market value of other property transferred, or to be transferred; and
• The amount of any liability assumed by the transferee, or to which the property is subject immediately before and after the transfer.
Generally, the buyer-transferee/agent/settlement officer does not have to withhold in a number of exceptions. Listed below are a few that may be applicable; however, IRS notification requirements must also be met.
• The buyer (transferee) acquires the property for use as a residence, and the amount realised (sales price) is not more than $300,000. The buyer or a member of his/her family must have definite plans to reside at the property for at least 50 per cent of the number of days the property is used by any person during each of the first two 12-month periods following the date of transfer. When counting the number of days the property is used, do not count the days the property will be vacant.
For this exception, the transferee must be an individual.
• The seller (transferor) gives the buyer written notice that no recognition of any gain or loss on the transfer is required because of a nonrecognition provision in the Internal Revenue Code, or a provision in a US tax treaty.
• The seller gives the withholding agent a certification stating, under penalties of perjury, he/she is not a foreign person, has a US taxpayer identification number and supporting documentation, e.g. a W-9.
• The buyer/withholding person receives a withholding certificate from the Internal Revenue Service that excuses withholding. Visit https://tinyurl.com/y4scncrn
• The amount the transferor realises on the transfer of a US real property interest is zero.
A withholding agent is any person having the control, receipt, custody, disposal or payment of income that is subject to withholding. Generally, it is the person who pays an amount to the individual foreign person(s) selling the real property subject to withholding must do FIRPTA withholding.
The withholding agent is also personally liable for the full amount of FIRPTA withholding tax required to be withheld from the foreign person (transferor), plus penalties and interest.
Step three. The process: here is where all that tedious paperwork comes into the picture.
In the second and final part, next week, we discuss the actual process for applying for an ITIN number; the forms utilised; the documentation and determination of whether withholding is required; what to do if your property sale is a loss; who and where to go for guidance through complex process of getting a refund from US IRS if your withholding agent over-withholds; and what to do if your property has been rented. Stay tuned.
Disclosure: this article is for general information purposes only and cannot be taken as legal, tax, immigration, financial or any other personal financial planning advice. The situation discussed today is a composite case illustration of a very generic problem for Bermuda residents investing abroad in any country that assesses taxes on real property bought or sold by foreign nationals.
• Martha Harris Myron CPA CFP JSM: Masters of Law — international tax and financial services. Dual citizen: Bermudian/US. Pondstraddler Life, financial perspectives for Bermuda islanders and their globally mobile connections on the Great Atlantic Pond. Finance columnist to The Royal Gazette, Bermuda. All proceeds earned from this column go to The Reading Clinic. Contact: email@example.com