Foreign Investment in Real Property Tax Act 1980 – Buyer AND Seller Beware - Part 2
Tax Resident Or Not?
Because a number of U.S. federal tax rules differ when a foreign person is involved or apply only to foreign persons, it is important for a U.S. real estate professional and a buyer’s attorney to understand when an individual or entity selling the real estate is considered foreign for U.S. federal income tax purposes.
A nonresident alien is defined for federal income tax purposes as an individual who is neither a U.S. citizen nor a resident of the United States within the meaning of IRC section 7701(b). An alien individual is a resident of the U.S. for federal income tax purposes if he or she meets either of the two tests under section 7701(b):
1) The first test is the “green card” test. If an alien has been admitted for U.S. permanent residence (i.e., has a green card) at any time during the calendar year, the alien is a resident of the United States and is taxed on his or her worldwide income, in the same way as a U.S. citizen. Otherwise, U.S. immigration status generally is not controlling or relevant for U.S. federal tax purposes.
2) The second test is the substantial presence test. Under the substantial presence test, an alien individual is a resident for U.S. federal tax purposes if the alien is physically present in the U.S. for 183 days or more during the current calendar year. Alternatively, if the alien is physically present for at least 31 days during the current year, the alien may be treated as a U.S. tax resident in the current year under a three-year look-back test in which each day of presence in the current year is counted as a full day, each day of presence in the first preceding year is counted as one-third of a day, and each day of presence in the second preceding year is counted as one-sixth of a day. If the total of such days is 183 days or more, the alien maybe a U.S. tax resident for the current year unless certain exceptions apply and the alien files certain required information with the IRS to claim the benefit of any relevant exception. As with the green card test, if an alien is a U.S. tax resident under either version of the substantial presence test, the alien is taxed on his or her worldwide income, the same as a U.S. citizen.
If the alien is from a country that has an income tax treaty with the United States, the treaty may act to change these results, subject to certain required filings with the IRS to claim the treaty benefit.
Also, in the first and last years that an alien might be subject to the substantial presence rule, it may be even more difficult to tell if the alien actually will be treated as a U.S. tax resident for that year due to timing issues and other elections that may have been made or tax treaty provisions that may be available.
Taxpayer Identification Numbers
It is noted above that once tax is withheld by the buyer, the foreign seller obtains credit for having paid this amount by receiving a stamped copy of Form 8288–A from the IRS. However, this will not be provided to the seller if the seller’s Taxpayer Identification number (TIN) is not included on that form.
The forms and other notices and elections relevant to FIRPTA withholding have always requested the TIN of the seller and buyer. However, if the seller or a foreign buyer did not already have a TIN, the prior regulations and forms accepted "Applied For" in lieu of the TIN and the seller’s TIN was not required to be provided until the seller filed its U.S. federal income tax return reporting the disposition of the real property interest.
However, Treasury Decision 9082 effective November, 2003 changed this position by requiring that all foreign buyers and foreign sellers of U.S. real property interests provide their TIN’s, names and addresses when disposing of a U.S. real property interest on withholding tax returns, applications for withholding certificates, notice of non-recognition, or elections to be treated as a domestic corporation under IRC section 897(i). It is well documented that for a number of tax and non-tax related reasons, the subject of identity has comes under far greater scrutiny in recent years.
If the seller sends Forms 8288 and 8288-A to the IRS for processing but does not list an Individual taxpayer Identification Number (ITIN) on the forms and does not attach a Form W-7 ITIN application (for individuals), the IRS will process the forms, but will not date stamp Form 8288-A "Copy B Mailed" or forward it to the foreign seller. Instead, the IRS will mail Letter 3794 SC/CG to the foreign seller, instructing the seller to apply for an ITIN by filing Form W-7.