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Published by the CIPS Network of the National Association of REALTORS®
Second Quarter 2004
Individual Taxpayer Identification Number Requirements Affect Property Purchases and Sales by Foreign Investors
By Steven L. Cantor, Esq. CIPS, FIPC
On August 4, 2003, the Internal Revenue Service (IRS) issued final Treasury Regulations requiring an Individual Taxpayer Identification Number (ITIN) from each foreign person at the time of filing all returns, statements, or other required documents for all closings dealing with the purchase or sale of a United States real property interest (USRPI) after November 3, 2003. These requirements apply to various Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) forms, including Internal Revenue forms 8288 (Withholding Tax Returns), 8288-A (Statement of Withholding), and 8288-B (Application for Withholding Certificate). A foreign person who either sells a USRPI or purchases a USRPI from another foreign person must have an ITIN. These requirements have had an immediate impact upon foreign owners of USRPI, and have already produced serious problems and confusion during real estate transactions involving foreign sellers.
On December 17, 2003, the IRS announced several procedural steps to strengthen control over the issuance of ITINs to be used for tax administration purposes rather than merely for personal identification purposes. In response to requests from various tax practitioners around the country, in late January 2004 the IRS issued informal internal procedures which require ITIN applicants to submit a newly revised IRS Form W-7 (Application for Individual Taxpayer Identification Number) along with proof that the ITIN will be used for federal tax administration purposes. The most common form of proof accepted by the IRS is the foreign person’s original completed federal tax return. In the case of disposition of USRPI by a foreign person, however, the foreign person need only submit with the new IRS Form W-7, a completed IRS Form 8288-B (Application for Withholding Certificate) and a copy of the contract for the sale of the USRPI. The IRS has indicated that ITIN applications submitted without such proof of need for tax administration purposes will be rejected.
The withholding provisions under FIRPTA require that a purchaser (“the transferee”) of a USRPI from a foreign person must withhold 10% of the total amount realized by the foreign person, unless one of several exceptions applies. While the transferee is directly responsible for the FIRPTA withholding tax, the agents of the seller (“the transferor”) or transferee can be held liable for an amount equal to their compensation from the transaction if they know that the transferee has been supplied with a false certification or statement claiming an exception from withholding and fail to notify the transferee. The new Treasury Regulations not only affect the sales of USRPIs, but as of September 4, 2003 also apply to deferred like-kind property exchanges by foreign persons and the use of limited liability companies (LLCs) by foreign persons.
Obtaining an ITIN is not often as quick or simple a procedure as one might expect. According to the Instructions for IRS Form W-7, a person should allow 4 to 6 weeks for the IRS to notify them in writing. Further adding to the complexity of the procedure is that the IRS has significantly reduced the number of documents it will accept as proof of identity to obtain an ITIN. Waiting until immediately before the day of closing to apply for an ITIN may result in the closing having to be delayed for quite some time. Real estate professionals who deal with foreign clients are well advised to see that their clients obtain the necessary ITINs well in advance of any transaction. The IRS has made it clear that it will continue to assist those individuals who seek ITINs to comply with the tax laws and will continue to review ways to improve the revised IRS Form W-7.
Steven L. Cantor, Esq. CIPS, FIPC is the managing partner of Cantor & Webb P.A., (www.cantorwebb.com) a Miami, Florida law firm that represents high net worth international clients, handling their tax, estate planning and real estate matters. He was one of the founders of the original CIPS program. You can e-mail him at steve@cantorwebb.com.
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