April 29, 2005

Thomas C. Roberge, CPA
St. Petersburg and Sarasota

Copyright, 2005, Thomas C. Roberge
All Rights Reserved

We have had several new foreign clients in the past year who have retained us to prepare their U.S. income tax returns to report their U.S. real estate sale that did not have the 10% FIRPTA withholding paid to the IRS.  Many of these sellers are now in shock to find out that they have to pay underpayment of estimated tax penalties to the IRS because the buyer signed the Statement of Intent to Reside at Property and did not withhold on the sale.

Many people think it is a good strategy for the buyer to sign the Statement of Intent to Reside at Property when purchasing from a foreign person and the contract price is $300,000 or less so as to avoid the 10% FIRPTA withholding.   The foreign seller is still obligated to file a U.S. income tax return to report the sale and pay the capital gains tax.  With the red-hot Florida real estate market many sellers are experiencing sizable gains - even at sales prices of $300,000 or less.  The IRS has rules that penalize a taxpayer if they do not timely pay their current year's tax.  The 10% withholding is an easy way to pay the estimated tax, obtain a U.S. tax ID number and file their income tax return.

The $300,000 exception is not as good a deal as it appears to be on the surface because of the underpayment of estimated tax penalty.  What is even worse from a perception standpoint is that these foreign sellers are not taking the time to try and understand why they are getting hit with these penalties.  Unfortunately - and wrongfully so - is that these frustrated foreign sellers frequently blame their realtor or closing agent for not telling them about the penalty problem in the first place.  We do not want to see this bad press for realtors and closing agents.

Let's face it - the real estate market is not going to cool off in the foreseeable future.  We strongly encourage you to think twice before having a buyer sign the Statement of Intent to Reside.  Your foreign client should also be getting advice of the tax consequences on the sale so they avoid getting caught in this tax penalty problem.