I am an international tax lawyer. I handle lots of real estate transactions with foreign sellers and buyers. I don’t have a real estate license, and I don’t ask for a piece of the commission. Got that out of the way for ya, didn’t I? Here are a few things to keep you sane when you handle a deal like that
Two mothers
“When Mama’s happy, everybody’s happy.” And in a real estate deal with foreign players, you have two mothers. Keep them both happy and you’re likely to close your deal on time.
Mama number one is your title officer. Ask a simple question. Demand a yes/no answer. “Have you handled a real estate transaction with a foreign seller/foreign buyer in it before?”
Don’t say “Can you handle one of these transactions?” Because of course they CAN. Right? And they will.
Right up until 5 days before closing and they figure out that the seller is a Bahamas corporation and they start insisting that you register the corporation with the Secretary of State and get a certificate of good standing from Sacramento and the Bahamas and oh, who are these people who claim to be the officers?
Mama number two is escrow. Especially for a foreign seller. Call up your escrow officer and ask the same question: have you done one of these transactions before?
Loyalty matters. But business is business. You don’t want your deal to be the crash test dummy. Let them learn on someone else.
War story: two summers ago, I handled two very similar deals in Southern California at the same time. Different title companies. One inexperienced title officer, one experienced. The novice title officer cost the buyer an extra $5,000 in legal fees to get the deal done.
Foreign seller
If your seller is a foreigner, here’s your checklist:
Tax ID number
The seller needs a U.S. tax identification number. More often than not they don’t have one. Go to the IRS website and pull down Form W-7 for a human seller. Get in gear early because if your seller is outside the U.S. they’ll have to go to the nearest U.S. Embassy or Consulate to get stuff signed and this process will take you weeks and you’ve got a commission waiting or an escrow clock ticking and time is money, bucko.
Weirdly, I can get tax ID numbers for foreign corporations over the phone more or less instantly, if “instant” includes long waits on hold listening to barely audible classical music.
Getting stuff signed
If your seller is not going to be on hand, you’re going to have a hard time getting stuff signed.
You have two choices: send the paper to them to get signed, or get your seller to appoint someone local to sign for them, using a power of attorney.
The better choice is to have them appoint an agent under a limited power of attorney to sign the listing agreement, contract, and (eventually) grant deed.
But first, remember your mothers. Get your power of attorney form pre-approved. Take it to the title officer and escrow officer you will use. Will each of them accept the power of attorney as binding?
Especially title. That power of attorney has to support a grant deed which is a recorded instrument, so it must have the magic words, be authenticated in the magic way, and be recordable for your local County Recorder. If, oh, hypothetically some goof bright young diplomat at a Consulate somewhere embosses a seal and your local County Cecorder bounces the document because they want inked seals instead, you have trouble.
Failing that, be prepared to ship paper back and forth via DHL or FedEx. And on the far end, your seller will have to go to the local Embassy or Consulate to sign stuff. The Consulate is 400 km from your seller’s home, of course, and open for business on alternate Thursdays from 1:30 p.m. to 1:35 p.m, but just in months with a “K” in them. So expect delays and the occasional do-over. All in a day’s work, right?
Yeah, there is this procedure called an “apostille.” It is supposed to work instead of notarization. In theory it works all the time. In practice it works most of the time. But I’ve had an employee in the Los Angeles County Recorder’s office tell me they don’t work. What would you rather be? Right? Or paid?
Withholding
The IRS wants 10% of the gross sale price. California wants 3 1/3%. Different rules and extra complexity with trusts and partnerships. Yes, the IRS will frequently reduce the withholding amount required. It takes them about 5 months to give you an answer. That doesn’t work so well with a 30 day escrow, does it? Fortunately there is a workaround. But the work involved in begging for mercy from the IRS is not worth the cost and time, unless it is a very big deal. Tell your seller to concede the withholding and file for a refund.
Tax returns
Your seller is required to file tax returns for the year of sale. And when they prepare the tax returns they might find they owe more money than the withholding tax. Grumpy, grumpy, grumpy!
Tax rates
Your foreign seller gets taxed at the same rates as a resident. No discrimination. Aren’t we nice?
Foreign buyers
The most important question you will ask your buyer is “What’s the name on the grant deed at close of escrow?” This is going to drive all of the tax results. Getting this wrong is costly. Costly to fix. Costly in estate tax if the buyer has the poor judgment to die while on title. Costly in capital gains tax if your buyer listened to some cocktail-party conversation and thinks that using a corporation is a good idea.
War story. Husband comes here. Plunks down a couple of million cash and buys a nice house. Wife comes along and inquires sweetly about why she isn’t named on title. Husband likes being married so makes hasty facepalm gesture and executes quitclaim deed naming wife as 50% owner of house. Result: $1,000,000 gift. First $133,000 is tax-free. Everything above that taxed. Yep.
War story. Woman comes here with fat wallet. Finds local. They buy apartment buildings 50/50 together. Handshake partnership. Several years go by. She has the poor judgment to die. Her sister comes in to see me. Calculation: estate tax exceeds her share of the equity. (See, the only first $60,000 of assets are tax free for dead foreigners, not $3.5 million. And guess what? Calculate that estate tax on the gross value of the property, not the value of the property net of mortgages.)
Signing documents is generally easier: you have a contract and escrow instructions to sign. If you have a mortgage, however, your buyer is going to sign a recorded document. So you’ll need someone with a good power of attorney, or you’ll ship paper overseas for a signature party at a Consulate or Embassy somewhere.
Rob Chipman says:
Great post, especially the use of the war stories. We use a different title system here, and have different tax laws, yet much of what you say still applies.
April 17, 2009 — 1:17 pm
Jeff Brown says:
What, if any, are the exemptions to withholding offered by the IRS/CA? Thanks — and welcome again.
April 17, 2009 — 1:56 pm
Phil Hodgen says:
@ Jeff Brown – I’ll have to do a quickie post on withholding on real estate deals and how to get out of it.
Federal: most often used is when the seller is out at a loss/breakeven and I prove to the IRS that there won’t be any tax liability ANYWAY so why withhold money just to make the seller wait months for a refund? Google for “Form 8288” which is the IRS form.
California: I usually don’t bother because the amount of withholding tax at 3 1/3% of sales price is a relatively small number that it is better to let Uncle Arnold take the money then file a tax return (which you have to do anyway) to claim the refund. Cheaper and faster. But Google for FTB and “Form 588” or look at http://www.ftb.ca.gov/individuals/wsc/withholding.shtml
But I’ll write about withholding in a future BHB post.
Lots of times the first time a nonresident seller wakes up is when the escrow officer says “Hey! Sign this Certificate of Nonforeign Status or I’m keeping 10% for taxes.”
Memo to all personnel: don’t let your escrow officer deliver the tax bad news to your seller. That’s bad business. Tell the foreign seller when you’re listing the property that a “Come to Jesus” U.S. tax moment is in the offing.
April 17, 2009 — 2:14 pm
Greg Swann says:
> Memo to all personnel: don’t let your escrow officer deliver the tax bad news to your seller. That’s bad business. Tell the foreign seller when you’re listing the property that a “Come to Jesus” U.S. tax moment is in the offing.
“Everybody born in the U.S.?” If the answer to that question is yes then I don’t have to worry about citizenship/naturalization, FIRPTA, etc.
Here’s one for you: Foreign national bought at $600,000, short-selling at $450,000. What now?
April 17, 2009 — 2:24 pm
Sean Purcell says:
Tough subjects expained clearly and with humor.
Nice post Phil. Nice addition Greg.
April 17, 2009 — 2:53 pm
Phil Hodgen says:
@ Gregg Swann – start from the assumption that the IRS gets its 10% even on a short sale.
Until our benevolent Congress starts handing out tax cookies in this area too (yeah well they’re handing out cookies to everyone except those of us who, y’know, actually work ‘n stuff) (but I digress), your seller is cooked.
Here’s what to do. It involves being able to work with the seller to extend the closing date. Real long escrow. As long as 5 months.
As soon as you go to contract, have your seller apply for reduction in withholding. To zero. Form 8288 is the form to use. It’s a pain. The IRS promises turnaround in 90 days but in my experience it takes them 5 months to process it.
Odds are REALLY good that if you do the paperwork right you’ll get the magic letter from the IRS authorizing sale at zero withholding.
The less fun alternative is that your seller — who by definition is broke — puts cash into escrow equal to the tax withholding amount, lets it go to the IRS, then files for a refund of the money. Bridge financing. But a short-sale seller doesn’t have money to do that, and is probably not the best credit risk in the world. Put this option in the theoretical but improbable category.
April 17, 2009 — 2:59 pm
Joshua Hanoud says:
Preface: I’m gonna be really blunt and maybe a bit low-brow (but we need more of that, right Greg? moderation in all things.)…
Holy crap I think Phil is one of my new favorite people. Way to come out swingin’, Sir.
April 17, 2009 — 5:56 pm
Brian Brady says:
“But first, remember your mothers. Get your power of attorney form pre-approved. Take it to the title officer and escrow officer you will use. Will each of them accept the power of attorney as binding?”
Oh brother, I hear ya. I had a US citizen sign a military POA and had it approved by the lender. His boat submerges, I execute loan docs with the attorney-in-fact.
I forgot about the mothers. Title wouldn’t record the deed claiming that they should have been consulted. In the end, the deed recorded 15 minutes after the boat docked (so all was well) but I learned a lesson today.
April 17, 2009 — 7:30 pm
Teri Lussier says:
>“When Mama’s happy, everybody’s happy.”
Very smart man! And funny too! Welcome to BHB.
April 18, 2009 — 7:46 pm