HOW TO APPLY FOR TAX REFUND FOR EXCESS WITHHOLDING TAX IN ANOTHER COUNTRY

The Internal Revenue Service stipulates that non-U.S. citizens, resident sellers must pay 15% of the house sales price as a withholding tax when selling a house. But we know that withholding tax is not really a tax to be paid, it is best to think of it as a deposit to ensure that foreign sellers will pay this tax because the IRS does not believe that foreign sellers will mail a tax payment check To the IRS.

For example: In 2014, a foreign couple bought a $1 million property in Los Angeles. In January 2019, they sold the property for $1.2 million.  The withholding tax is 180,000 (1.2 million X 15% = $180,000). But the actual income tax they have to pay is about 30,000, because the IRS usually levies 15% of the value-added part of the house (200,000 X 15% = $30,000). Although only $30,000 of actual income tax is owed, the property transfer notary company will hand over 180,000 to the Internal Revenue Service when the transaction is concluded. The couple will have $150,000 tax refunds, but when will they receive them?

There are several options for obtaining a timetable for excess withholding tax:

Normal Tax Refund schedule -Foreign home sellers can file tax returns in the following year after the house is sold, but it takes a few steps to submit the application (applying tax rebates to the IRS is quite difficult, this process is much more complicated than expected). But assuming that the sellers (such as the couple in the example above) successfully complete each step, they will receive a tax refund in the second year after the sale. Even though this waiting time was long (18 months after the buyer’s transaction ended), the couple were lucky enough to receive their tax refund.

8288-B option: the fastest tax refund application – Foreign home sellers can apply for an 8288-B fast tax refund through an experienced tax expert such as DIRECTS. This application is known to be fast approved. The profit is 200,000, so only 30,000 income taxes are owed, but the IRS owes 150,000 tax rebates to the seller. With the correct application, home sellers can receive tax refunds within 4 months after the sale through the 8288-B process and obtain the withholding tax refund approval certificate, the couple in the example above received 150,000 tax refunds more than one year before they passed the normal tax refund.

Be careful – many foreign home sellers will never receive their tax refund – many foreign home sellers cannot receive the tax refund. Once again, foreign buyers who want to receive tax refunds need to complete many correct steps. If the seller applies improperly, the IRS will deduct the excess withholding tax. It is difficult to say what percentage of foreign home sellers will never receive their excess withholding tax refund, but it is certain that a considerable percentage of foreign home sellers will never receive their tax refund. Therefore, a professional tax team like DIRECTS is crucial to help foreign sellers successfully receive all withholding tax refunds and become a winner.

Foreign home sellers have about 3 to 4 years to successfully recover the tax refund after the sale, so the tax refund for the sale of the house in the previous years is still possible. If our sales of the above listed property occurred in 2018 instead of 2019, foreign home sellers can still recover the tax refund. But if it is longer, the IRS Restriction Decree will prohibit foreign sellers from receiving any tax refund. Therefore, foreign home sellers have more than one year to apply for a tax refund after the house is sold. They can apply for a withholding tax refund for houses sold in previous years

INDIVIDUAL TAXPAYER IDENTIFICATION NUMBER (ITIN)

Foreign home sellers must apply for ITINs (US individual taxpayer identification number). If a non-U.S. Citizen or resident homeowner does not receive an ITIN, they will never receive any 15% withholding tax refund. Foreign home sellers need a professional tax professional to assist them in applying for ITIN. DIRECTS can be of professional help concerning this. In the ITIN application, the foreign house seller must submit some documents and the IRS application form. More importantly, it must provide a passport certification issued by the country where the house seller belongs. The seller can pass the passport authentication in the following ways:

The US consulate in the country where the seller’s passport is issued

If the non-U.S. Citizen or the resident seller agrees to mail the passport to any DIRECTS office (Acadia, Irvine or Palm Desert) by FedEx. After receiving the passport, DIRECTS will conduct a video conference with the foreign seller through WeChat or Skype and notarize the passport. After the meeting, the IRS will immediately send the passport back to the seller by FedEx. DIRECTS is an agency that is authorized by the US Internal Revenue Service for passport verification and notarization, so foreign home sellers can avoid the trip to the United States consulate if they are willing to mail their passports through FedEx to any of DIRECTS office.

If foreign sellers are in the United States, they can bring their passports to DIRECTS offices in Arcadia, Irvine or Palm Desert for passport verification and notarization.

The fastest time a foreign home seller can submit an ITIN application is after signing a home sales agreement. If they have sold out the house but need to apply for an ITIN to get a tax refund, they can submit an ITIN application immediately. Foreign sellers should contact DIRECTS for the best way to apply for the ITIN.

Regarding withholding tax requirements for non-U.S. citizens and residents earning rental income through real estate owned in the United States, the IRS stipulates that homeowners who are non-US citizens and residents must pay 30% of the IRS monthly rent as a withholding tax when renting a property. For example, a foreigner buys a house in Irvine, California, and rents it to a tenant at $2,000 per month. However, the $600 of the rent received from the homeowner must be paid to the IRS directly as a withholding tax. Foreign sellers should also know who is responsible for passing the 30% rent withholding tax to the IRS. The Foreign homeowners, American property management companies or anyone who helps foreign homeowners collect rent, and even tenants are obliged to pay a 30% rent withholding tax to the IRS. If the IRS fails to anticipate withholding tax of 30% of the rent, this will result in the seizure of the foreign homeowner’s house and even affect future immigration plans.

There are situations where non-citizen homeowners can easily fail to fulfill the 30% withholding tax obligation. A non-citizen homeowner who rents a house and obtains rental income can easily fail to fulfill the 30% withholding tax obligation. How to do it? Foreign homeowners must legally fail to perform the 30% withholding tax obligation according to the following procedures:

 

Foreign homeowners must file their taxes in the second year of rental. The homeowner must declare rental income and pay taxes if taxes are required. But do they actually need to pay any taxes? In many cases, the answer is no! At the time of tax declaration, foreign homeowners only need to declare the net income of the rental house, which means that many items can be used to offset tax including loan interest fees, advertising fees, cleaning fees, property management fees and various other expenses. The result is that foreign homeowners pay no taxes at all. In the example given earlier, a foreign homeowner who bought a house in Irvine received a monthly rent of $2,000. After the correct tax return, the foreign homeowner does not have to pay taxes and is legally exempt from the 30% rent withholding tax.

Foreign homeowners must obtain an American taxpayer identification number (ITIN) if they have not previously applied for it.

Finally, the foreign homeowner must complete the W-8ECI application form of the Internal Revenue Service. If the foreign homeowner does not have an ITIN, he cannot submit the W8-ECI application form. W-8ECI needs to be resubmitted every three years.

By applying for an ITIN and submitting a W-8ECI application form, the foreign homeowner who rented Irvine houses at a monthly rent of $2000 and the IRS effectively reaches an agreement. If the foreign homeowner files annual tax returns for US rental income, the IRS exempts foreign homeowners 30% rent withholding tax obligation. Therefore, foreign homeowners do not have to pay a 30% rent withholding tax, but only if they have to file a tax return. After the foreign homeowner has applied for tax deductions including loan interest fees, property management fees, maintenance fees, it is very likely that foreign homeowners do not have to pay taxes in the end.

DIRECTS helps foreign homeowners and property management companies on behalf of foreign homeowners to apply for an ITIN and to process tax returns on rental income. TAX REFUND