Foreign investors are generally not subject to US tax on US source capital gain unless it is effectively connected with a US trade or business, or it is realized by an individual who meets certain physical presence requirements.
Gain from the disposition of a U.S. real property interest (USRPI), however, is treated as income effectively connected with a US trade or business under the Foreign Investment in Real Property Tax Act (FIRPTA). This FIRPTA gain is subject to tax and withholding under Code Sec. 897 and Code Sec. 1445.
Stock or a beneficial interest in a US real property holding corporation (USRPHC) is a USRPI.
Under pre-2015 PATH Act law, in the case of any disposition of a USRPI by a foreign person, the transferee was required to deduct and withhold at the rate of 10% of the amount realized on the disposition.
Effective dispositions made on or after February 16, 2016, the new PATH Act increases the FIRPTA withholding rate to 15% on the dispositions of USRPIs and other prescribed transactions.
However, the PATH Act provides for a reduced FIRPTA withholding rate of 10% in the case of a disposition of property which is acquired by the transferee for use by the transferee as a residence, and the amount realized for the property does not exceed $1,000,000, provided the exemption for a residence bought for $300,000 or less does not apply.
Few days ago Senate Finance Committee approved a Bill that would modify the FIRPTA – Foreign Investment in Real Property Tax Act. The affected foreign investors are primarily the shareholders of REIT – Real Estate Investment Trusts, however, the changes would also encompass other foreign investors in US real property.
Among other things the Bill if enacted would increase the FIRPA withholding tax under IRC 1445 from 10% to 15%. It would also impose additional reporting requirements than those exist now. For example, real estate brokers may also have a reporting requirements when they sell property owned by foreign investors!
It is important to monitor the development as it would significantly increase the burden on the withholding agents and buyers of the properties.
We at CPA Global Tax & Accounting are monitoring the developments and will post an update as soon as the Bill is finalized in its present form or with any changes. Please contact us (firstname.lastname@example.org) if you need additional information about the provisions of the Bill.
In a recent court case, the taxpayer who argued that by living in Germany for many years and selling his US properties a long time back, he had relinquished his Lawful Permanent Residence (LPR) or a green card and hence should not be subject to US taxes on his income. However, IRS did not accept this and court agreed with IRS making the taxpayer liable for the tax.
IRS contended that the taxpayer was liable for income tax deficiencies for 2004 and 2006 – 2009 (almost all of which was attributable to the gain on his installment sale of stock). IRS argued that (1) because the taxpayer did not formally abandon his LPR status (obtained in ’77) until 2010, he remained an LPR during the years in issue, and (2) because he was not taxable by Germany as a German resident during those years, he was not a German resident under Article 4 of the Treaty. Therefore, he was not exempted from U.S. taxation by the Treaty.
The Tax Court reasoned that the taxpayer did not formally renounce or abandon that status until Nov. 10, 2010, when he filed a Form I-407 and surrendered his green card to the USCIS consistent with the requirements of Reg. § 301.7701(b)-1(b)(3).The Court rejected the taxpayer’s argument that he “informally” abandoned his LPR status. The Court held that for Federal income tax purposes, the taxpayer’s LPR status turns on Federal income tax law and was only indirectly determined by immigration law. The taxpayer’s reliance on an immigration case that recognized “informal” abandonment was misplaced. Unlike immigration law, the Code and regs were not silent on the point at which a taxpayer’s LPR status was considered to change. The requirements set out in Code Sec. 7701(b)(6)(B), Reg. § 301.7701(b)-1(b)(1), and Reg. § 301.7701(b)-1(b)(3) for abandoning LPR status
The Internal Revenue Service announced the successful start of its new web-based system — IRS Direct Pay — on IRS.gov, which lets taxpayers pay their tax bills or make estimated tax payments directly from checking or savings accounts without any fees or pre-registration.
IR 2014-67 further reports that “To date, more than 150,000 taxpayers have paid more than $340 million in taxes through the new IRS Direct Pay system. With IRS Direct Pay, taxpayers receive instant confirmation that the payment has been submitted, and the system is available 24 hours a day, 7 days a week. Bank account information is not retained in IRS systems after payments are made.
From the “Pay Your Tax Bill” icon at the top of the IRS home page, taxpayers can access IRS Direct Pay, which walks the taxpayer through five simple steps. The steps include providing your tax information, verifying your identity, entering your payment information, reviewing and electronically signing and recording your online confirmation.
IRS Direct Pay offers 30-day advance payment scheduling, payment rescheduling or cancellations, and a payment status search. Future plans include an option for e-mailed payment confirmation, a Spanish version and one-time registration with a login and password to allow quick access on return visits.”
For further guidance please contact any of the CPA Global Tax professionals at email@example.com.
Internal Revenue Service today issued Notice 2014-21 providing answers to 16 FAQ’s while dealing with Virtual Currency such as Bitcoins. These FAQ’s explains how the transactions using Bitcoins are treated for Federal tax purposes. In general, Bitcoins are treated as property for U.S. tax purposes and general tax rules for property transactions apply in these cases.
The Notice further states that:
Among other things, this means that:
- Wages paid to employees using virtual currency are taxable to the employee, must be reported by an employer on a Form W-2, and are subject to federal income tax withholding and payroll taxes.
- Payments using virtual currency made to independent contractors and other service providers are taxable and self-employment tax rules generally apply. Normally, payers must issue Form 1099.
- The character of gain or loss from the sale or exchange of virtual currency depends on whether the virtual currency is a capital asset in the hands of the taxpayer.
- A payment made using virtual currency is subject to information reporting to the same extent as any other payment made in property.
In tax year 2011, the most recent year for which figures are available, some 3.3 million taxpayers claimed deductions for business use of a home (commonly referred to as the home office deduction) totaling nearly $10 billion.
The new optional deduction, capped at $1,500 per year based on $5 a square foot for up to 300 square feet, will reduce the paperwork and recordkeeping burden on small businesses by an estimated 1.6 million hours annually.
The new option is available starting with the 2013 return taxpayers are filing now. Normally, home-based businesses are required to fill out a 43-line form 8829 often with complex calculations of allocated expenses, depreciation and carryovers of unused deductions. Instead, taxpayers claiming the optional deduction need only complete a short worksheet in the tax instructions and enter the result on their return.
IRS today announced that it posted the revised FATCA regulations in the Federal register for publication.
This contains the regulations coordinating chapters 3, 4, 61, and Section 3406 of the Internal Revenue Code as well as the revised final FATCA regulations.
IRS also posted on its website the revised certain FATCA Forms. These Forms were in draft form until now:
- Form 1042
- Form 8966
- Form W-8BEN
- Instructions to Form W-8BEN
- Form W-8ECI
- Instructions to Form W-8ECI
It is important to note that the foreign entity receiving the US source FDAP income should file Form W-8BEN-E and is not eligible to file W-8BEN.