40% estate tax due on real estate held by foreigners?

Question

Hello,

I'm in the process of purchasing a SFR in Florida from an individual living outside the US. This individual and his deceased wife are both on the title of the home and neither are/were US citizens or legal residents. They purchased the property as a vacation home in 1993 and used it as such until the wife passed away 5 years ago. The death records have all been provided to the title company. We're supposed to be closing this weekend but I just received a call from the title company stating that the closing will likely be delayed because they cannot find record of any estate taxes being paid upon the wife's passing. They also stated the tax would be 40% of an estate over $60,000 but were unsure if that applied to the sales price, the capital gains or the market value so they're attempting to engage a CPA.

Does anyone have experience or expertise in this area? We were just about to cross the finish line with this purchase and I'm afraid this tax issue, if accurate, could cause the seller to walk away.

Thanks,

Josh

Tom Gimer · Answer

Sounds more like FIRPTA issues than estate taxes, but that may also depend upon how title is reflected of record. If you provide the tenancy stated in the deed of record, the purchase price, and then confirm whether or not the buyer intends to reside in the property as his/her/their primary residence and I can post the info that will help clarify this for you.

Tom Gimer · Answer

@Josh Walworth FIRPTA is interesting in that while it is the SELLER'S money we are talking about, it is the BUYER'S responsibility to make sure it is paid.

Settlement agents are supposed to withhold based on the PURCHASE PRICE unless an exemption applies or the seller obtains a withholding certificate from the IRS directing title to withhold a different amount. The seller should get busy on this.

To read more: https://www.irs.gov/pub/irs-pdf/p515.pdf

Josh Walworth · Answer

Thank you everyone for the great feedback thus far. From what I have been able to research on my own, it looks like this is subject to FIRPTA and Estate taxes. The seller is a German citizen and his wife was legal resident of Germany. There appears to be a tax treaty with German that would give German citizens a similar estate tax exemption as a US Citizen ($11.58 million in 2020) so I believe no taxes are due in that regard.

In terms of FIRPTA, the purchase price is $125K. The property deed is in the name of the seller and his deceased wife. I'm buying the property as a 2nd home but may not keep it for the 2 years required to avoid FIRPTA. That said, is the seller's cost basis adjusted for inflation or is it based on the actual purchase price he paid in 1993 when he acquired the property?

Thanks again for the great advice. I'm not represented by a Realtor or lawyer in this purchase so I'm relying heavily on the title company who doesn't seem to have enough experience with this type of transaction.

Best,

Josh

Eamonn McElroy · Answer

@Josh Walworth

Yes, it's likely a US estate tax return should have been filed for the wife when she passed, as the property is a US situs asset and was directly & jointed owned by the couple.

They should consult a US CPA, perhaps the title company can recommend one if they deal with a good number of foreign investors.

Basit Siddiqi · Answer

@Josh WalworthYou may need to look to see if there is a treaty in place between the US and the country where the foreigner lives.

40% estate tax due on real estate held by foreigners?

40% estate tax due on real estate held by foreigners?

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