Do I have to withhold money when buying real estate from a foreigner?

Question

I have recently purchased a house in the U.S. for ~$375,000 (and I'm a U.S. citizen). It was disclosed to me about a week before closing that the sellers were from China. Aside from a few headaches, the sale went through and I've now owned the house about a month.

The other day, I got a letter from the IRS stating that the sellers had filled out Form 8288-B and that the withholding amount had been reduced to ~$10,000. It then said something about being required to fill out From 8288 and 8288-A involving "withholding tax for dispositions by foreign persons".

What are these forms? Why do I have to withhold tax?

Should this have been disclosed to me by my attorney/real estate agent?

Answer 1

Form 8288 is to report to the IRS withholding of capital gains tax that may be due from the seller. Foreign nationals don't always file tax returns, so they often didn't pay capital gains tax on properties that they sold. Congress decided to make the buyers responsible for this tax so that they would have a better chance of collecting it. There is a penalty against the buyer if that tax is not withheld.

Your attorney should have filed this form on your behalf as part of the closing papers. I think your first step is to look at your copy of the closing papers and see if money was withheld from the sale. There definitely should be disclosure of these requirements before the sale. You should also follow up with your attorney to see whether he has already filed the forms 8288 and 8288-A on your behalf.

If you had purchased for less than $300,000 (and were purchasing for your primary residence), you would not have to file that form, but since the property was under $1,000,000 the withholding rate is only 10% (rather than 15%).