Thomas C. Roberge & Company

RENEWED IMPORTANCE FOR

FOREIGN SELLERS OBTAINING WITHHOLDING CERTIFICATES

ON REAL ESTATE SALES

June 15, 2007

Thomas C. Roberge & Company

St. Petersburg and Sarasota

Telephone: (727) 822-9393

When a non-U.S. person sells U.S. real estate, the U.S. tax authorities (“IRS”) require that 10% of the gross sales price be withheld at closing and paid as an estimated capital gains tax payment on behalf of the foreign seller. If the actual tax liability is less the buyer can obtain a refund by following certain procedures.

There are three ways for dealing with the 10% withholding:

Having the 10% withheld and filing an income tax return for a refund in the year following the sale.
Applying to the IRS for relief from the 10% withholding. This procedure is commonly referred to as a “Withholding Certificate”. The seller must still file an income tax return for the year of sale.
For sales of $300,000 or less, the buyer can sign a statement avoiding the 10% if they meet certain conditions. Most buyers will not sign this statement when they see the risks involved. Even if there is no withholding, the foreign seller must still file an income tax return for the year of sale.

Applying for relief from the 10% withholding (the withholding certificate) has the advantage of getting all or a part of the 10% to the seller in the shortest amount of time if the actual tax is less than 10% of the sales price. The application must be filed between the time the sales contract is signed and the closing date. If the application is filed after the closing date (even by one day), the entire 10% must be remitted to the IRS and the seller must generally wait until the following year to file an income tax return for a refund.

When the withholding certificate application is timely filed the 10% remains in escrow with the closing agent until the application is approved. It normally takes 90 to 120 days for the application to be approved. At that time the reduced tax is remitted to the IRS and the balance of the 10% is sent to the seller. This procedure has the added advantage of keeping as much of the money from the IRS as possible.

The alternative is for the 10% to be remitted to the IRS with the seller filing an income tax return for a refund of any over withholding. The PROBLEM with this strategy is that the IRS has misapplied many of these 10% payments in 2006 and 2007 resulting in delays and added costs for those trying to obtain their over withholding refunds.

In 2006 the IRS moved its services associated with handling the 10% withholding from the Philadelphia Service Center to two other regional processing centers. This change has resulted in many of these 10% payments not being applied to foreign sellers’ tax accounts with the IRS. This is causing significant delays in foreign sellers obtaining their rightful refunds.

Until this problem is resolved the best solution is for a foreign seller to apply for relief from the 10% (“withholding certificate”) before the closing date. This will ensure that all or part of the 10% goes to the seller in the shortest amount of time.

Our firm represents many foreign sellers and processes numerous withholding certificate applications each year. We know the people in the IRS who review these applications and have the expertise to see that the 10% withholding is freed up in the shortest amount of time.

Call us at (941) 952-5848 or (727) 822-9393 for us to review your situation to see what the best alternative is for you.

Internal Revenue Service Circular 230 Disclosure – You are hereby advised that any tax advice contained in this newsletter is not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or to support the marketing of any tax transactions or matters addressed herein.