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We sat down with Yaakov (Kenneth) Kastner, who specializes in US taxation for foreign investors in US Real Estate, to hear his advice come tax season for GPs with foreign LPs. Here are his five best tips.
Make sure you’re covered by hiring a CPA with experience in the international tax field to ensure you comply with the IRS’s requirements.
Form W-8BEN is similar to Form W-9, but the W-9 is only for a US person (as defined on the form). A foreign person must complete Form W-8BEN, and a foreign entity must complete Form W-8BEN-E.
The purpose of this form is to provide you (and your CPA) with critical information on the foreign partner, such as their US tax ID number (if they have one) and which country they are from (for tax treaty purposes). This information is critical for your CPA to prepare accurate Forms K1 and 8805, more on that later.
Here’s where it gets a little tricky: What if the foreign person opens an LLC and invests in your partnership through that LLC – should they complete form W-8 or W-9? If the foreign person is the sole owner of the LLC, then the default classification of that LLC would be a “disregarded entity” for tax purposes, and so the form must be completed by the owner of the LLC and not the LLC itself.
Since the owner is a foreign person, the correct form is the W-8BEN. However, if the LLC is owned by 2 or more partners, the default classification would be a US partnership and the correct form in that scenario would be the W-9.
Form W-8BEN is a good place to find out whether the foreign person has a US tax ID number such as an ITIN or a social security number. If not, they will likely need to obtain an ITIN by submitting Form W-7 to the IRS.
Pro tip: It is highly recommended to obtain an ITIN with the help of a CAA (certified acceptance agent) as opposed to trying to do it alone.
A list of CAAs can be found on the IRS website, and the application is generally submitted together with the applicant’s first tax return (Form 1040NR).
Don’t worry if they can’t get an ITIN before you need to file the partnership tax return, as long as they are in the process of applying for one so that they will have a number by the time the following tax season comes around.
In addition to providing each partner with a Schedule K1, partnerships must also provide Form 8805 to each foreign partner in the partnership. As the K1 shows each partner’s allocated gain or loss based on partnership membership percentages, similarly, the 8805 shows how much tax was withheld from each foreign partner.
The amount of withholding is calculated based on the partnership’s gain during the tax year, and it depends on the type of income (rental income, capital gain, etc). If there is a net loss at the partnership level for the tax year, there is generally no tax withholding requirement.
In that scenario, any distributions made to the partner may be considered a return of capital, which is generally not taxable. Generally, tax withholding calculations and payments should be done each quarter to avoid penalties.
You can make your CPA’s life easier by providing clear and accurate information on all of the partners ahead of tax season. Doing it right the first time prevents the dreaded ping-pong game of collecting info for the tax return, prevents the delay in issuing K1s to the partners, and saves precious time during tax season for both you and your CPA, resulting in a win-win!
Yaakov (Kenneth) Kastner, CPA (Isr), EA, CAA is a Partner and Head of the US Tax Department at VBIR Accountants (Member of GGI International), specializing in US taxation for foreign investors in US Real Estate.
Yaakov and his team at VBIR work closely with the Financial Products team at Agora, leveraging technology and professional tax services for their clients. He can be reached at [email protected].
You can learn more about Agora’s tax season preparation services right here.