What Is an Out-of-State-Seller Withholding?

South Carolina residents have likely seen an increase in the amount of out-of-state sellers dealing with real property. For tax purposes, you might wonder, “What is an out-of-state-seller withholding?” For these and other real estate law questions, speak with a qualified South Carolina real estate attorney.

Out-of-State Buyers of South Carolina Real Property

An out-of-state buyer should consider South Carolina’s complex real estate laws when buying property. You may want to consider:

• Property value
• Property trends
• The ideal location for your purchase
• If your investment might depreciate or appreciate in value

An attorney and real property agent can work with you through the entire purchase of any property you are considering to ensure you have all of the relevant documents needed to complete the purchase.

The Foreign Investment in Real Property Tax Act (FIRPTA) applies when a foreign party sells real property in the United States. Under FIRPTA, a buyer (through their escrow company or an agent helping complete their buyer-seller transaction) is required to withhold part of the sales price and typically sends it directly to the IRS. The withholding tax can be considered a security deposit, the IRS says must be provided to make sure a foreign seller pays the tax.

The Process for Purchasing South Carolina Real Estate

Non-residents can be subject to seller withholding taxes. Someone is considered an out-of-state seller if:

• On the date of closing, they live permanently outside South Carolina
• They are incorporated as a business outside of South Carolina (there are a few exceptions)
• They have a partnership with a corporation with a principal place of business outside South Carolina
• A trust exists that’s administered outside of South Carolina
• They are a decedent who lived outside South Carolina at the time of death
• They are a non-resident alien, which refers to any person who is not a legal citizen or resident in the United States. Students are not considered non-residents but fall under a special category that is subject to tax withholding when selling real estate in the United States).

Of note, in South Carolina, real property purchasers must withhold seven percent of a gain for an individual purchaser and five percent for corporations if they’re a non-resident, unless the subject property was a primary place of residence for an individual’s last two of their last five years and wasn’t used for a place of business or for a rental property.

There are other tax-free withholding exemptions, like estate or inheritance gifts. For additional information, speak with a knowledgeable local real estate law attorney.

Withholding Rates for United States Real Property Interests

Under FIRPTA, the IRS requires 15 percent of the sales price to be withheld on the sale by any foreign person of any real property interest for an amount above $1,000,000. FIRPTA further requires either 15 percent or 10 percent on sales by a foreign person for an amount between $300,001 and $1,000,000 and either 15 percent or 0 for sales of $300,000 and under.

In most cases, the buyer, or transferee, is the withholding agent and must find out if the seller, or transferor, is a foreign person. If the buyer fails to withhold the taxes, the transferee could be responsible for the tax for the real property. When a business sells a United States property interest, the business itself is considered the agent for withholding purposes.

FAQs

Q: What Is the IRS Withholding for Foreign Sellers?

A: For foreign corporations selling US real property, the IRS will require them to withhold a tax equal to 21 percent of the gain recognized on the issuance to its foreign corporate shareholders.

As a transferee, it must deduct and withhold tax regarding the entire amount recognized by the foreign seller on the disposition of the real property interest at the rate of 15 percent (unless it was sold before Feb. 17, 2016, and then it’s 10 percent).

Q: What Is the Amount Realized?

A: The amount realized is considered the sum of the principal amount of the cash paid, or what will be paid, the FMV (or fair market value) of additional property sold or to be sold, and the total liability assumed by the property transferee or liability immediately before and after the transfer.

When the relevant property is owned by any foreign entity plus another person, the amount made is distributed according to funds originally provided by each transferor.

Q: What Is the Withholding Tax on US Sales of Real Property?

A: Withholding tax for sales of real property in the United States refers to the security deposit the IRS mandates that foreign sellers pay called the Foreign Investment in Real Property Tax Act (FIRPTA). The buyer on a sale of US real property must withhold a percentage of the total amount, considered to be the sale price, at the time of the closing of the sale of the real property.

Q: Is It Possible for a Foreign Seller to Avoid Withholding Tax in the United States?

A: Under the Foreign Investment in Real Property Tax Act, a foreign seller of US real property cannot avoid a withholding tax and is subject to tax withholding at the sale closing. The buyer must submit the withholding to the IRS. While you can’t avoid the FIRPTA obligations, a foreign seller may request a refund so long as the claim is filed within a certain time period after the sale.

Q: Can Someone Get Withholding Tax Returned in South Carolina?

A: In South Carolina, to request the return of an overpaid withholding tax, file an amended nonresident withholding statement. To request a withholding refund before the tax year of the sale ends, file an I-290 form, indicating the Amended box. Or, if the tax year has ended, file an income tax return, report any real estate capital gains, and take credit for the real estate withholding as a nonresident.

Trusted Lawyers for Your South Carolina Real Property Tax Withholding Matters

At Mack & Mack Attorneys, we can explore your real property tax options. We can answer any questions you might have about out-of-state taxes or any related matters. Contact us to speak with an attorney right away.