THE $300,000 EXCEPTION
CAN PRESENT PROBLEMS
TO A FOREIGN SELLER

February 22, 2006

Thomas C. Roberge & Company
St. Petersburg and Sarasota

Telephone: (727) 822-9393
Contact: TaxInfo@RobergeCo.com

Copyright, 2006, Thomas C. Roberge & Company
All Rights Reserved

When a foreign person sells U.S. real estate at a sale price of $300,000 or less and the buyer signs the Statement of Intent to Reside at Property (the "Statement"), there is no 10% withholding from the seller's proceeds.  However, the seller is still required by U.S. tax law to file a U.S. income tax return for the year of sale to report the sale and pay tax on the gain.

This sounds like a good deal for the seller since he or she receives the full sale proceeds at the time of sale.  Nevertheless, the seller needs to make an estimated tax payment in this situation to avoid potential underpayment of estimated tax penalties and file a tax return the following year to report the sale.  Furthermore, if the tax for the year of sale is not paid by April 15 of the following year then there is interest on the balance due (compounded daily) plus additional penalties.

In this situation where the buyer signs the Statement, it is not a problem for the foreign seller to make an estimated tax payment if he or she already has a U.S. tax ID number.  However, the seller cannot arbitrarily make an estimated tax payment if they do not have a U.S. tax ID number.  They would then generally have to wait to file for the tax ID number when they file their U.S. income tax return the following year and pay the tax at that time.  If tax is due then the seller can be assessed underpayment of estimated tax penalties, and interest and additional penalties if the tax is not paid by April 15th.

This is another example as to why the $300,000 exception is not always such a good deal for a foreign seller.  There are numerous problems facing the seller and the buyer with the $300,000 exception.  The foreign seller should definitely seek competent professional advice before going down this hazardous road.

There are alternative strategies for obtaining a U.S. tax identification number.  However, they must be employed at the earliest possible moment.  Please contact us if you wish to discuss these strategies.

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.