FATCA & U.S. Real Estate – Hidden Traps in the Sale or Purchase of Real Estate
U.S. Real Estate can negatively impact FATCA Reporting.
While not everyone who is out of compliance with FATCA (Foreign Account Tax Compliance Act) will receive a FATCA Letter, and/or be contacted by the IRS — for the individuals that are contacted and audited/examined, they may be subject to extensively high fines and penalties for failing to file FATCA Form 8938.
When combined with FBAR Penalties (Report of Foreign Banks and Financial Account), which can reach as high as 100% value of the foreign account balance in a multi-year audit in which the IRS believes you were willful, it is important to consider getting into compliance.
Think You Won’t Get Discovered?
Maybe you won’t. But, as a tax law firm that limits their entire practice to international tax and offshore disclosure, we have heard every excuse in the book. Some are very good, and some, well — are not so good…
The following is three (3) ways individuals unsuspectingly get caught being out of FATCA Compliance, when they thought there was no way possible that the IRS or U.S. Government could find them.
Sale of U.S. Real Estate – FATCA Catalyst
We represent numerous foreign investors who maintain investments in the United States. Why? Because these clients were smart enough to purchase investments during the downturn of the economy, when foreign currency was strong. For example, when the Euro was much stronger backing 2008, many foreign individuals (who are still subject to U.S. Tax as Green Card Holders, Dual-Citizens or Visa Holders) purchased U.S. homes at bottom barrel prices, which have since increased in value significantly.
Since the home is not a primary residence, unless another exemption/exclusion applies, capital gain will have to be paid, which can lead to three (3) main issues.
FIRPTA is the Foreign Investment in Real Property Tax Act. When property is being sold by a foreign person, the United States requires a realtor to take additional steps regarding withholding, to ensure that the individual pays tax. There are ways to reduce FIRPTA through proactive planning – but nevertheless, even though you are a “U.S. Person” since you reside overseas, the United States may presume you are a foreign person. Conversely, when you complete the forms and identify that you have a Social Security number and/or that you are a US person — it could be the catalyst that sparks an audit… and lands you in hot water with the US government as a U.S. Person with foreign accounts, assets, etc. that have not been reported to the U.S.
During the sale of the property, you will presumably have to open an escrow account to hold funds. When you complete the forms, the forms will ask you where you reside and you will have to identify that you reside overseas. While you may believe you can use a U.S. address, the next issue will be trying to transfer money or deposit money from your foreign account into the escrow funds (Whether directly from the sale or in a subsequent transfer).
By opening the escrow account and identifying your foreign address – when it comes time to report to gain – it could cause the IRS to want to investigate further regarding the status.
Transferring the Money out of the U.S.
Once you receive money from the sale of the property you are going to want to transfer that money outside of the United States and back your home country or 3rd party country. This can get very complex, very quickly. That is because under new reporting rules, both the U.S. and Foreign Institutions are required to file additional paperwork when transferring the money across borders.
Moreover, many U.S. banks have become extremely hesitant and transferring money outside of the United States, and they may ask you to sign certain forms regarding your US status. If you were to intentionally lie or misrepresent his status on this form, it is a crime and you could get in the trouble.
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Sean holds a Master's in Tax Law from one of the top Tax LL.M. programs in the country at the University of Denver. He has also earned the prestigious IRS Enrolled Agent credential. Mr. Golding's articles have been referenced in such publications as the Washington Post, Forbes, Nolo, and various Law Journals nationwide.
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