There’s this question that I always get from my clients: “Do I have to report my real estate holdings in a foreign country?” To which, my answer (in true accountant style) is always: “It depends”. Let me explain further.
You may be a first generation immigrant to the US and still have strong ties to your home country; by way of family elders who live there or a strong sense that you would like to some day retire back there, where you grew up. Or you are an adventurous investor who would like to invest in a little vacation home by the beach in the Caribbean. Or you were stationed abroad through your job and loved it so much that you invested in some property there. Then this blog is for you to read!
The FATCA makes it mandatory for U.S. citizens, Green Card holders and foreign individuals with substantial presence in the US, to disclose all of their offshore holdings on their tax returns (via Form 8938), or on the FBAR, now known as Form FinCEN 114. Due to Inter-Governmental Agreements (aka IGAs), foreign financial institutions also disclose this information to the U.S. government.
Form 8938, Statement of Specified Foreign Assets, applies to foreign financial accounts, including stock in foreign companies and stakes in foreign business partnerships. So, what about your real estate holdings in foreign countries, do they have to go on these forms?
If your foreign real estate holdings were held directly by you, then it is NOT a specified asset that needs to be reported on Form 8938, for example, your personal residence or a rental property.
Please Do Not Stop Here! Read On!
- If these real estate holdings were held by a foreign entity, such as a foreign corporation, partnership, estate or a trust, in which you have an interest, then ONLY the investment in this foreign entity must be reported on Form 8938, if the form thresholds are met.
The value of this interest would be determined by the fair market value of the real estate holdings.
If point # A applied to you, there are other reporting requirements in addition to Form 8938.
- If the foreign property is in your name and is rented out, the rental income is to be reported on Schedule E of Form 1040. The allowable expenses are the same as if the rental property was in the US, however, the depreciation is taken straight-line over a period of 40 years instead of 27.5 years.
- If the foreign property was inherited, if the inherited property was transferred to your personal name then it not a specified asset to be reported on Form 8938 unless the inheritance was an interest in a corporation, partnership or trust that held real estate.
- If the foreign property in your personal name were to be sold, you will have to report short term or long term capital gains, as the case may be, via Schedule D to Form 1040 in the year the sale occurred. You may be eligible to get a foreign tax credit against your US taxes, if taxes were paid on the sale in the foreign country where the property was located.
- If the foreign property was your personal residence, that is if you lived in the foreign property, 2 out of previous 5 years, immediately prior to the sale, you may be eligible for an exclusion on the sale- of $250,000 if filing as single or $500,000 if filing married & joint.
Agreed that owning property in a foreign country is not a walk in the park, but understanding the rules and regulations will keep you in compliance, and will make it manageable. Please make sure you completely understand your compliance requirements if any of the above apply to you. Better yet, consult an Enrolled Agent!
Original Post By: Manasa Nadig
Bibliography: Form 8938, Statement of Specified Foreign Financial Assets; Form 1040 & Schedules D & E; Internal Revenue Code § 121; Publication 946.
Due Diligence is a BIG buzz word in tax professional circles! Especially since many taxpayers unaware of their requirement to file FBARs, blame the tax preparer on whom they reasonably relied. The tax practitioner in turn relies in good faith on the information provided to them by their clients, and are not required to audit the records of the client.
Circular 230, § 10.22 lays out the level of due diligence required to be exercised by Practitioners (Attorneys, CPA s, Enrolled Agents or Enrolled Actuaries):
(a) In preparing or assisting in the preparation of, approving, and filing returns, documents, affidavits, and other papers relating to Internal Revenue Service matters;
(b) In determining the correctness of oral or written representations made by him to the Department of the Treasury; and
(c) In determining the correctness of oral or written representations made by him to clients with reference to any matter administered by the Internal Revenue Service.
In addition to the above, a tax practitioner is also required by Circular 230, § 10.34 to not ignore the implications of any information provided. The tax professional should also advise the taxpayer of any potential penalties of non-compliance.
If the tax practitioner determines that there is a foreign bank account to report on Schedule B, he is not obligated to prepare the FBAR form for the client. He can do so only if he feels competent and the client has agreed to this additional service.
Notwithstanding the above lack of obligation to prepare the FBAR, the practitioner does have an obligation to advise the client of the need to file the FBAR form and the consequences of failing to do so.
So What Questions Should Your Tax Preparer Be Asking You About Your Foreign Accounts?:
- Do you have accounts in countries other than the United States?
- What are the nature of the bank accounts and how much are the balances therein.
- Have you reported these accounts every year?
- Did you have income from these accounts? If yes, has the income been included on the tax return?
- How have you answered the question on Schedule B of Form 1040, Part III, Line 7a?
- If thresholds were met, was FinCEN Form 114, Report of Foreign Bank & Financial Accounts aka FBAR filed? (FinCEN Form 114 was known as TD F 90-22.1)
- If thresholds were met, was Form 8938, Statement of Specified Foreign Financial Assets, filed with the tax return?
- Are you a beneficiary of a foreign trust? If so what is the nature of the relationship? Have you received a distribution?
- Do you own stock in foreign companies or partnerships? If so what percentage of the total is it?
- Are you a participant in a foreign retirement plan?
With a heightened availability of information to the Internal Revenue Service about foreign bank accounts through many Inter-Government Agreements, tax payers who have accounts in foreign banks or other such instruments should make sure their tax practitioners are asking the above questions.
Know Your Responsibility: If you are one of those reading this blog and have undisclosed foreign bank accounts, I cannot assert enough how important it is for you to come forward voluntarily with disclosure. The Internal Revenue Service’s 2014 Offshore Voluntary Disclosure Program (OVDP) is still open. If the IRS contacts you about these accounts then you will be subject to heavy fines & penalties and you will no longer have the chance to file under the OVDP
We are on the verge of finishing up another of hubby’s DIY projects at home, the basement is a mess, dusty, I can barely make my way to the treadmill every morning! I guess it will get done eventually! I use this as an analogy for DIY tax preparers everywhere: Why Hiring An Enrolled Agent To Do Your Taxes is Important?
Keeping Up With Tax Law Changes: As we turn a page on another year, January dawns bright and peppy. For Enrolled Agents everywhere, it is the time to get ready for another tax season; take update classes, download updates to software programs, send out organizers to their clients & draft new engagement letters. And all of 2013 was spent keeping up with the IRS’ minimum 24 per year Continuing Professional Education requirements. What this means to you? An enrolled agent is up-to-date with the latest tax law changes. This is especially important for the 2013 Filing Season. This also means your Enrolled Agent is going to make sure you do no procrastinate till the last minute to file your taxes.
Handy Research Tools: Enrolled Agents know how and where to look for answers. They have at their disposal tools to constantly monitor updates. DIY tax software programs in a box, depend on you answering their questions correctly to get you the optimum tax return. Those algorithms work for many whose tax returns are very simple with a couple of W2s and few more items, throw one life changing event in there, like a child going to college/helping a child paying off a student loan, all of which should have been pre-planned with a professional who would advise you on steps that you need to take before hand. Extensive knowledge of taxes makes an Enrolled Agent aware of the exact filing status for you, make decisions based on numbers whether you should itemize or not and also plan for the future.
E-Filing Your Tax Returns: How many of you DIY-ers still resort to pen and paper to do your taxes? IRS Statistics have shown that 20% of tax returns are still done by hand. This subjects tax returns to higher chances of math errors, no signatures or dates. The hand done returns are then input into the system before the IRS processes them. This delay in processing can be avoided by e-filing your tax return with an Enrolled Agent. E-filing means faster processing, faster refunds and an option to have any dues directly debited to your bank account.
Protection From Identity Theft: The IRS reported that identity theft had affected 1.6 million taxpayers in 2013, and that is more than those affected in 2012. An Enrolled Agent makes sure your personal information is protected always and takes extra precautions to make sure your records are properly processed.
Tax Planning: Enrolled Agents are the only federally-licensed tax practitioners who specialize in taxation and have unlimited rights to represent taxpayers before the Internal Revenue Service. Not all important tax decisions are made during filing time, it’s equally important that you are aware of where you may stand at tax time through out the year. An Enrolled Agent keeps track of your finances in relation to taxes, and helps you plan accordingly, so there are no surprises. These decisions involve withholding taxes, retirement contributions, flexible spending accounts etc.
The South Korean Ministry of Strategy and Finance has announced that, following recent meetings in Washington, D.C., South Korea and the United States have agreed to the regular exchange of tax information, from next year, to implement the Foreign Account Tax Compliance Act (FATCA).
FATCA, enacted by the US Congress in 2010, is intended to ensure that the US obtains information on accounts held abroad at foreign financial institutions (FFIs) by US persons. Failure by an FFI to disclose information on their US clients, including account ownership, balances and amounts moving in and out of the accounts, will result in a requirement to withhold 30 percent tax on payments of US-sourced income.
South Korea and the US have therefore agreed the text of an inter-governmental agreement (IGA) to allow for the automatic exchange of information between the South Korean National Tax Service (NTS) and the US Internal Revenue Service so that South Korean FFIs can comply with FATCA. The completion of an IGA had first been discussed between the two countries in April 2012.
The Ministry stressed that, under the IGA, the automatic exchange of information would be reciprocal. In fact, it was stated that, under the agreement, the NTS would also be able to obtain information, in September each year, concerning the financial accounts of South Koreans residing or working in the US that yield more than USD10 in interest annually.
The agreement with the US comes at a time when, in a bid to reduce the incidence of tax evasion, the NTS is trying to put pressure on those South Korean residents who are found to hold substantial unexplained financial accounts in overseas jurisdictions. South Koreans with overseas financial accounts worth more than KRW1bn (USD927,000) are currently obligated to report the assets, and to explain the sources of the funds, or pay at least a 10 percent fine.
Banks, investment firms and insurance companies are among the FFIs that will be subject to the IGA, which is expected to be signed shortly and come into effect sometime next year.
– See more at: http://www.tax-news.com/news/South_Korea_US_Agree_Text_Of_FATCA_Agreement_____64126.html#sthash.HUQw8dHl.dpuf