Foreign Investors Should Take Notice of NEW IRS US Real Estate Focus

According to Law360, the Internal Revenue Service's Large Business and International Division announced two campaigns aimed at tax compliance by nonresident aliens in connection with U.S. real property interests.

In 2017, the division announced a new audit strategy known as campaigns that focused on issue-based rather than entity-based examinations, and focusing on those issues that present a significant risk of noncompliance. The objective is to improve return selection through identifying issues representing a risk of noncompliance and making the greatest use of the IRS' limited resources. Currently, there are nearly 60 IRS campaigns, several of which relate to the cross-border issues of high net worth individuals.

The October campaign is a rerelease of a campaign initially announced in March, which was withdrawn shortly after it was posted on the IRS website. It focuses on nonresident aliens, receiving rental income from U.S. property and the requirement to comply with the Internal Revenue Code's reporting and filing requirements related thereto.

The September campaign targets nonresident alien compliance with the withholding and reporting obligations of the Foreign Investment in Real Property Tax Act, or FIRPTA, on transfers of U.S. real estate.

The Purchase Of U.S. Real Estate By Foreign Nationals Is A Major Source Of Investment In The U.S. Property Sales To Foreign Buyers In 2019 Totaled $78 Billion.

In recent years, the largest share of foreign residential buyers originated from China and Canada, followed by Mexico. So, it is not surprising that the IRS might want to target tax compliance in this area.

Tax levied under FIRPTA initially is collected through withholding, and the obligation to withhold is placed on the purchaser, rather than the seller, of the U.S. real property interests. 

Unless An Exemption Otherwise Applies, The Purchaser Is Required To Withhold 15% Of The Total Purchase Price If The Seller Of The Property Is A Foreign Person.

The withholding tax requirement simply ensures that U.S. tax will be collected and incentivizes nonresident aliens to file appropriate tax returns that report income from the sale, and claim a credit for the withheld funds, particularly if the withheld tax exceeds the actual U.S. tax due.

For a typical disposition of U.S. real property interest subject to the FIRPTA regime, the purchaser is required to file a U.S. withholding tax return for dispositions by foreign persons of U.S. real property interests, Form 8288 and a statement of withholding on dispositions by foreign persons of U.S. real property interests, Form 8288-A together with payment of the withheld tax by the 20th day following the sale.

After receiving the submitted forms, the IRS will stamp Form 8288-A to acknowledge receipt of the withheld tax and send a copy to the seller for inclusion in filing a tax return. When there is more than one foreign seller, the purchaser is required to prepare separate Forms 8288-A for each transferor and withhold tax from each based on the full amount realized, as allocated among the transferors.

In addition to the Form 8288 and 8288-A filing requirements, the nonresident alien seller also must file a U.S. federal income tax return on Form 1040NR - US Nonresident Alien Income Tax Return reporting the sale and paying the actual tax due on the gain, calculated using the applicable graduated tax rates, or requesting a tax refund to the extent that the withheld amount is more than the tax due.

The U.S. taxation applicable to a nonresident alien acquiring U.S. real estate is exceedingly complex. It implicates inquiry by the nonresident alien purchaser of the U.S. real estate to ascertain whether withholding is required. It requires consideration of how to structure the acquisition, either to hold the real estate directly, through an LLC, through a partnership, trust or corporation, and the potential tax consequences of each of such structures.

If the nonresident alien anticipates renting the property, it requires consideration of whether that activity will result in a trade or business, or, if not, the benefits of making a net election under the code or a treaty.

It requires consideration of the U.S. gift and estate tax implications of the acquisition and holding of the real estate to avoid potential imposition of a U.S. transfer tax. It requires consideration of the state taxation consequences. It requires consideration of whether the tax structure in the U.S. is efficient with the tax system of the nonresident alien's country of citizenship. The two IRS campaigns should be viewed as a wake-up call to potential and current nonresident alien investors as to the necessity of undertaking a detailed U.S. tax analysis.

Need Help Investing in US Real Estate?

 Contact the Tax Lawyers at

Marini & Associates, P.A. 

for a FREE Tax HELP Contact us at:
www.TaxAid.com or www.OVDPLaw.com
or Toll Free at 888 8TAXAID (888-882-9243)

 

It May Be Time For You To Retitle Your Hong Kong Registered Vessel

The IRS has announced in Ann. 2020-40, 2020-45 IRB the effective date of the termination of the U.S.-Hong Kong agreement to exempt from income tax, on a reciprocal basis, income from the international operation of ships. 

The Shipping Agreement is Terminated Effective for Tax Years Beginning on or after January 1, 2021.

In August 1989, the U.S. and Hong Kong concluded an agreement to exempt from income tax, on a reciprocal basis, income from the international operation of ships (the “shipping agreement”). The shipping agreement was effective for tax years beginning on or after January 1, 1987. (Notice 97-40, 1997-2 CB 287)

On July 14, 2020, the President issued an Executive Order (EO) on Hong Kong Normalization, which, among other things, directed the Commerce Department to give Hong Kong notice of intent to terminate the shipping agreement. (E.O. 13936)

IRS has announced that he termination of the shipping agreement is effective for tax years beginning on or after January 1, 2021. 

Need International Tax & Shipping Advice?

The Tax Lawyers at

Marini & Associates, P.A. 

for a FREE Tax HELP Contact us at:
www.TaxAid.com or www.OVDPLaw.com
or Toll Free at 888 8TAXAID (888-882-9243) 

IRS Issues Final Regs Regarding Foreign Persons' Sale, Exchange of Partnership Interest

The IRS has released final regs that provide guidance for certain foreign persons that recognize gain or loss from the sale or exchange of an interest in a partnership that is engaged in a trade or business within the U.S.

The final regs retain the basic approach and structure of the proposed regs with certain revisions described below. 

1. Determining deemed sale EC gain or deemed sale EC loss. The final regs retain the basic framework of the proposed regs, including the factual determinations regarding assets attributable to an office or fixed place of business in the U.S. maintained by the partnership ("office attribution rule") (Reg §1.864(c)(8)-1(c)(2)(ii)(B) through Reg §1.864(c)(8)-1(c)(2)(ii)(E)) 
2. Ten-year exception. The final regs retain the ten-year exception as an exception to the determination of deemed sale EC gain and EC loss under Reg §1.864(c)(8)-1(c)(2)(i)(A). 
3. Sourcing rules. The final regs make several changes to the general sourcing rule provided in Prop Reg §1.864(c)(8)-1(c)(2)(i).
4. Look-back rule for inventory property. The final regs provide a look-back rule for determining the foreign source portion of deemed sale EC gain or EC loss attributable to inventory property that is held by the partnership on the date of the deemed sale. 
5. Look-back rule for intangibles. To minimize the difficulty of applying the sourcing rules to intangible property and to provide more certainty, the final regs provide a separate rule for intangibles (including going concern value) that determines the foreign source portion of deemed sale gain or loss attributable to intangibles by using a proxy method that is based on the source of the partnership’s historic gross ordinary income. (Reg §1.864(c)(8)-1(c)(2)(ii)(C)) 
6. Depreciable personal property. The final regs provide a two-part approach for determining the foreign source portion of deemed sale EC gain and EC loss attributable to depreciable personal property. The first part applies a recapture principle to the extent of depreciation adjustments taken with respect to the property. The second part focuses on where the property is located to the extent the property has deemed sale EC gain in excess of its depreciation adjustments or if the property has deemed sale EC loss. (Reg §1.864(c)(8)-1(c)(2)(ii)(D)) 
7. Material change in circumstances rule. The final regs provide a material change in circumstances rule for inventory and intangibles. When this rule applies, the foreign source portion of deemed sale EC gain or EC loss attributable to inventory property or intangibles may be determined using a modified look-back period. Taxpayers can use this material change in circumstances rule to remedy an incorrect sourcing result with respect to inventory property and intangibles. (Reg §1.864(c)(8)-1(c)(2)(ii)(E)) 
8. Treaty coordination. The final regs retain the general rule that prevents taxation of gain on assets that do not form part of a U.S. permanent establishment, but also address certain gains that may be taxed without regard to whether there is a U.S. permanent establishment (for example, gains from the disposition of certain USRPI). (Reg §1.864(c)(8)-1(f)) The final regs also add a rule coordinating these regs with treaty provisions governing the disposition of USRPI, which allow the U.S. to tax gain derived from the disposition of the USRPI without regard to whether the USRPI forms a part of a partnership’s permanent establishment. (Reg §1.864(c)(8)-1(f)) Partner-specific exclusions and exceptions. Under the final regs, a foreign transferor’s distributive share of deemed sale EC gain or EC loss does not include any amount that is excluded from the foreign transferor’s gross income or otherwise exempt from U.S. Federal income tax under the Code. (Reg §1.864(c)(8)-1(c)(3)(i)) 
9. Clarification of Sec. 897 coordination rule with respect to nonrecognition provisions. The final regs clarify the interaction between the Code Sec. 897 coordination rule and the nonrecognition provision described in Reg §1.864(c)(8)-1(b)(2)(ii). Specifically, the final regs provide that any transfer of an interest in a partnership as part of a nonrecognition transaction will not be subject to Code Sec. 864(c)(8) to the extent that the gain or loss on the transfer is not recognized. Instead, if the partnership owns one or more USRPI, Code Sec. 897(g) and its regs will apply with respect to the unrecognized gain or loss. (Reg §1.864(c)(8)-1(d)) 

The final regs generally apply to transfers occurring on or after December 26, 2018 (that is, the date on which the proposed regs were filed with the Federal Register). While not subject to these final regulations, transfers occurring on or after November 27, 2017, but before December 26, 2018, are subject to Code Sec. 864(c)(8). In addition, the final regs apply to amounts taken into account on or after December 26, 2018, pursuant to an installment sale occurring on or after November 27, 2017 and before December 26, 2018. (Reg §1.864(c)(8)-1(j) and Reg §1.897-7(c)) 

Have IRS Tax Problem?

 Contact the Tax Lawyers at
Marini & Associates, P.A. 

for a FREE Tax HELP Contact us at:
www.TaxAid.com or www.OVDPLaw.com
or Toll Free at 888 8TAXAID (888-882-9243) 

Sources

IRS

Thomson Reuters