Magazine article Journal of Property Management

Don't Turn Away Those Foreign Dollars

Magazine article Journal of Property Management

Don't Turn Away Those Foreign Dollars

Article excerpt

[ILLUSTRATION OMITTED]

Over the past few years, being a property manager has become a little more interesting with the changes in the economy and the fall of home prices. The shift in home prices has made the U.S. a haven for foreign investors who purchase property and maximize their ROI with rental income. Due to falling prices, as well as the high-quality U.S. building codes and the prestige of owning property in the U.S. these investors are not going away anytime soon. According to a 2013 report by the National Association of Realtors[R], international clients purchased an estimated $68.2 billion worth of residential property in 12 months ending March 31, 2013, or 6.3 percent of the total value of all U.S. home sales for the period.

For property managers, this can be a complex opportunity. There are a few things to consider when taking on a foreign investor. The financial benefits are obvious, but you need to consider what your risks could be. With some understanding of the U.S. tax compliance requirements and a well structured intake process, you can remove yourself from these risks altogether.

DEFINE A U.S. NONRESIDENT

One of the first things to consider is, "How do I define a U.S. nonresident owner for tax purposes?" In most cases, the answer is quite clear. The individual is a citizen of another country, they visit infrequently and simply own property in the U.S. When it is unclear whether the individual in question is considered a resident or nonresident of the U.S. for income tax purposes, there are two basic tests: First, The Green Card Test (examining if they have a Green Card or not); Second, The Substantial Presence Test (a formula based on the number of days the owner spends in the U.S.). Be aware of "the domestic single-member LLC myth." Many property managers make the mistake of assuming that a domestic single-member LLC is held to domestic tax standards. In fact, if the member is a nonresident of the U.S., the property income that individual has is subject to a different standard, possibly including the mandatory 30 percent of gross rent withholding ("FIRPTA"). These considerations can also be applied to foreign partnerships, foreign corporations or trusts.

WITHHOLDING AGENT

Any person or company who collects rent on behalf of a foreign homeowner is considered a "Withholding Agent" by the IRS. Withholding Agent status was created from the Foreign Investment in Real Property Act of 1980 ("FIRPTA"). The basic principle of FIRPTA, when it was introduced, was the concept of mandatory income tax withholding. FIRPTA puts the onus on those who have control of the funds derived from certain types of income, referring to those individuals or companies as Withholding Agents. A Withholding Agent is defined as Any U.S. or foreign person that has control, receipt, custody, disposal or payment of any item of income of a foreign person that is subject to withholding. As a Withholding Agent, you are personally liable for any tax required to be withheld, independent of the tax liability of the foreign person to whom the payment is made. If the withholding agent fails to withhold, submit the 30 percent tax as required and the foreign payee fails to satisfy their U.S. tax liability, both parties are liable for the tax and any related penalties and interest. Basically, the IRS is going to find it much easier to collect income tax from the Withholding Agent in the U. …

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