TAX 9869 Lecture Notes - Lecture 37: Passive Income, Internal Revenue Code Section 1031, Payment

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17 Jul 2020
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PART 2:
Rule: For FDAP income there is a withholding tax @30%
FDAP income is generally passive income, could be broader- service
income
If non US individual/corp engaged in trade/biz in US, we shall talk about.
If not engaged, just receiving passive income- div, interest, rents, royalties,
then w-holding tax @30%.
Holding agent has to collect W-8// forms to know person is a foreign
person
W-8 INY- pship
The w-holding tax not only on nonUS individual, also on foreign corp- 30%
stat rate in US
Important exception to the w-holding tax rules: Portfolio interest
exception
Generally speaking: non-US person (foreign person) lends $ to a US
corp. When a US corp pays interest, withhold 30% when pays foreign
person interest pmt.
If you lend US individual, would take 30%
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You are a person/individual/rez and citizen of China. Decide to invest $ and
buy an apt in NYC. You rent out apt. Hold it for investment purposes, plan
on selling it. When you receive rental pmts from person in NY, that person
pays you rent and you’re a foreign person (Chinese national), does that
person withhold 30% tax?
What is the source of that rental pmt? Only withholding tax on US
source income
How is rent sourced? Location of where ppty is used.
Real estate in NYC. Rental pmts sourced to US//US
sourced income.
Whoever is renting that apt has to take 30% of rental pmts, pay
over to IRS
You are a foreign person and you are subject to a w-holding
tax.
We could have a treaty that says less, but for rental pmts,
treaties don’t usually reduce them.
Important rule to know: foreign investment real property act (FIRPTA). If a
foreign person owns real estate in the United States/US real property
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interest (USRPI), then if that person sells the interest, he is
automatically subject to US taxation on that sale.
A foreign person- individual, corp, pship (look through), FIRPTA
could apply and there is US taxation on the sale of the US real property
interest on Real estate
ex) Individual from China bought apt in NYC for $100, rented it out for
5 years, and then decided to sell for $200. Basis= $100, received $200 of
proceeds= $100 of gain. Subject to US tax on $100 of gain.
Whenever foreign person- individual/corp, owns US real estate//real
ppty interest, US tax on disposition/sale. If not sale, some tax-free
reorganization, look @rules.
You buy a home. Stack of papers to sign. Buried in there, paper that
discusses residence of seller, certifies US person
FIRPTA under Sec. 8697 requires: sell ppty for $200, how does IRS get
tax? I am supposed to file US tax return to report gain ($200-$100=$100).
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