SOLUTION DESCRIBED – AGENT 100% LIABLE FOR 30% PAYMENT TO IRS BY COLLECTING RENTS FOR A FOREIGN OWNER
This is a follow-up article to my post AGENT 100% LIABLE BY COLLECTING RENTS FOR A FOREIGN OWNER TO PAY 30% TO THE IRS here on Activerain. Several readers (and clients) requested information on how to continue to properly represent foreign person owners of USA properties that receive rental income, and NOT be liable for the 30% mandatory withholding requirement of the IRS. Indeed the answer is to obtain and retain a CERTIFICATE OF FOREIGN ORGANIZATION FOR US TAX WITHHOLDING – also known as IRS Form W-8ECI.
In order to avoid the requirement that 30% of the GROSS income from the rental of a property owned by a foreign person, the IRS Form W-8ECI is a mandatory document to be received by any real estate property manager. The Instructions state that the Form W-8ECI when properly completed and executed, allows the withholding agent (the property manager collecting the rents) to be excused from submitting the mandatory 30% of the gross rents to the IRS as a withholding tax. The form must be maintained by the withholding agent! It is NOT sent to the IRS, but must be available for inspection. The form is only valid for 3 years, after which you must get a new form signed and dated by the foreignperson. I would suggest it be retained for 10 years after income is no longer received on behalf of the foreign person by the property manager.
An explanation of the completion of the IRS Form W-8ECI is as follows:
Line 1 of the form is to be the name of the foreign person. If it is an entity and there is a single owner, then the form should be filled out with the single owner’s name and the entity name and identification number can be put in on line 8.
Line 2 should be filled in with the country where a foreign company named on line 1 is formed.
Line 3 is a check the box. Select the entity that best shows what form of the entity is best.
Line 4 is for the permanent address of the person or entity entered on line 1.
Line 6 is for the US taxpayer identification number. This is for the person or entity on line 1, the social security number (SSN), employer identification number (EIN), or IRS individual taxpayer identification number (ITIN). Most foreign person property owners will likely need an ITIN, which is obtained using Form W-7 and usually takes 30 to 45 days to receive. If you are an individual and qualified to obtain a SSN, this is obtained through the local Social Security Administration Office using Form SS-5.
Line 7 is for those whose country of residence has issued them (individual or entity) a tax identifying number. For example, a resident of Canada would enter their Social Insurance Number.
Line 9 is to enter the items of income that are effectively connected with the conduct of the trade or business in the United States. For a rental property, enter the address of each rental property.
The Certification at the end of the form needs to be signed by the beneficial owner of the income, or if the beneficial owner is not a person, then by an authorized representative or officer of the beneficial owner. If it is being signed by a Power of Attorney, it is recommended that IRS Form 2824 be used and be attached to the Form W-8ECI.
Note that if a Power of Attorney is used, the agent along with the principal (beneficial owner) may incur liability for the penalties provided for an erroneous, false or fraudulent form. Therefore, I would not recommend doing your client a favor and using the Power of Attorney form – remember, the road to a lawsuit is paved with good intentions………….
SPECIAL NOTICE: THIS IS NOT SPECIFIC LEGAL ADVICE AND IT IS NOT INTENDED TO BE LEGAL ADVICE TO ANY ONE CLIENT IN PARTICULAR. YOU SHOULD CONSULT WITH YOUR ATTORNEY BEFORE FOLLOWING THIS OR ANY GENERAL LEGAL OPINION. THE AUTHOR ASSUMES NO LIABILITY FOR ANY PERSON ACTING ON THE INFORMATION CONTAINED IN THIS ARTICLE.
Copyright 2011 Richard P. Zaretsky, Esq.
Be sure to contact your own attorney for your state laws, and always consult your own attorney on any legal decision you need to make. This article is for information purposes and is not specific advice to any one reader.
Richard Zaretsky, Esq., RICHARD P. ZARETSKY P.A. ATTORNEYS AT LAW, 1655 PALM BEACH LAKES BLVD, SUITE 900, WEST PALM BEACH, FLORIDA 33401, PHONE 561 689 6660 RPZ99@Florida-Counsel.com – FLORIDA BAR BOARD CERTIFIED IN REAL ESTATE LAW – We assist Brokers and Sellers with Short Sales and Modifications and Consult with Brokers and Sellers Nationwide! Shortsales@Florida-Counsel.com New Website www.Florida-Counsel.com