what realtors need to know about firpta - foreign investment in real property tax act

FIRPTAForeign Investment in Real Property Tax Act

Buying or Selling, what every Realtor should know

ANGEL FRANCISCO CONDOM, P.A. 3650 N.W. 82ND AVENUE, SUITE 308, DORAL FLORIDA 33166 - O (888) 591-0008 - F (888) 818-5999 - E [email protected]

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Foreign Investment in Real Property Tax Act

• FIRPTA Withholding!

Withholding of Tax on Dispositions of United States Real Property Interests!!The disposition of a U.S. real property interest by a foreign person (the transferor) is subject to the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) income tax withholding. FIRPTA authorized the United States to tax foreign persons on dispositions of U.S. real property interests. A disposition means “disposition” for any purpose of the Internal Revenue Code. This includes but is not limited to a sale or exchange, liquidation, redemption, gift, transfers, etc. Persons purchasing U.S. real property interests (transferees) from foreign persons, certain purchasers' agents, and settlement officers are required to withhold 10 percent of the amount realized on the disposition (special rules for foreign corporations). In most cases, the transferee/buyer is the withholding agent. If you are the transferee/buyer you must find out if the transferor is a foreign person. If the transferor is a foreign person and you fail to withhold, you may be held liable for the tax. For cases in which a U.S. business entity such as a corporation or partnership disposes of a U.S. real property interest, the business entity itself is the withholding agent.


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• FIRPTA Withholding - TRANSLATION!

Withholding of Tax on Dispositions of United States Real Property Interests!!1. The US government gave itself the right to TAX Foreigners that are transferring property located here in the USA.!2. If it is a USA property and the owner is a Foreigner which transfers it out of their name: it is governed by FIRPTA.!3. The “Transferee” (BUYER) can be a person or company that is buying the property or acting as AGENT.!4. The “Transferee” is responsible for WITHHOLDING 10% of the value of the property sold in most cases. !5. The “Transferee” could end up being the one that pays the taxes on the transfer if they do not withhold the 10%.!6. *A corporation owned by a Foreigner becomes the withhold agent for the 10% withholding required by FIRPTA.


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• U.S. Real Property Interest!

A U.S. real property interest is any interest, other than solely as a creditor, in real property (including an interest in a mine, well, or other natural deposit) located in the United States or the U.S. Virgin Islands, as well as certain personal property that is associated with the use of real property (such as farming machinery or hotel furniture). It also means any interest, other than solely as a creditor, in any domestic corporation unless it is established that the corporation was at no time a U.S. real property holding corporation during the shorter of the period during which the interest was held, or the 5-year period ending on the date of disposition. If on the date of disposition, the corporation did not hold any U.S. real property interests, and all the interests held at any time during the shorter of the applicable periods were disposed of in transactions in which the full amount of any gain was recognized, then FIRPTA withholding would not apply.


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• U.S. Real Property Interest - TRANSLATION!

1. A U.S. real property for purposes of a realtor concerned about FIRPTA is any REAL ESTATE or attachments in ! the US (Farming equipment or Hotel furniture are examples)!!2. A Creditor (someone that make a loan on REAL ESTATE IS NOT SUBJECT TO FIRPTA withholding.!!3. A Corporate entity (LLC or CORPORATION) are not subject to FIRPTA when you sell it if they have not ! owned REAL ESTATE in the last 5 years. AS LONG AS IT DID ITS TAXES AND DECLARED ITS PROFITS AND ! OR LOSSES IN REAL ESTATE.


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• Rates of Withholding!

The transferee must deduct and withhold a tax equal to 10% (or other amount) of the total amount realized by the foreign person on the disposition. The amount realized is the sum of !

• (1) The cash paid, or to be paid (principal only), !

• (2) the fair market value of other property transferred, or to be transferred, and !

• (3) the amount of any liability assumed by the transferee or to which the property is subject immediately before and after the transfer. The amount realized is generally the amount paid for the property. If the property transferred was owned jointly by U.S. and foreign persons, the amount realized is allocated between the transferors based on the capital contribution of each transferor.


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• Rates of Withholding - TRANSLATION!

The transferee must deduct 10% of the amount the Foreign person is realizing on the transfer:! !1. whatever they where paid or whatever the property value is (established by “acceptable source”) if it ! was not sold, for example; if it was “given” to a relative and!!2. the fair market value of the property or!!3. what “liability” is assumed by the person receiving the property: if A & B own a property with a ! mortgage and A (a Foreigner) transfers his half to to B then: A must WITHHOLD 10% of the value of ! the mortgage still owed and send in his IRS forms to B to be processed by the IRS.


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• Rates of Withholding - continued!

A foreign corporation that distributes a U.S. real property interest must withhold a tax equal to 35% of the gain it recognizes on the distribution to its shareholders. A domestic corporation must withhold a tax equal to 10% of the fair market value of the property distributed to a foreign shareholder if !

• (1) the shareholder's interest in the corporation is a U.S. real property interest, and !

• (2) the property distributed is either in redemption of stock or in liquidation of the corporation.


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• Rates of Withholding - continued TRANSLATED!

A FOREIGN corporation that distributes a U.S. real property interest must withhold a tax equal to 35% of the gain it recognizes on the distribution to it’s shareholders. (the difference between the amount of money they put into the property and how much it sold for when they transferred it AS DIVIDED INTO SHARES for THE FOREIGN SHARE HOLDER )!!A DOMESTIC (FLORIDA CORP) corporation must withhold a tax equal to 10% of the fair market value of the property distributed to a foreign shareholder if !

• (1) the shareholder's interest in the corporation is a U.S. real property interest, and !

• (2) the property distributed is either in redemption of stock or in liquidation of the corporation. (REDEMPTION is trading stock for money) (LIQUIDATION is selling the whole company to another person or corporation.)


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Exceptions from FIRPTA Withholding!There are 9, only 6 apply to real estate in the form realtors sell it.!

!Generally you do not have to withhold in the following situations; however, notification requirements must be met:

!You (the transferee) acquire the property for use as a home and the amount realized (generally sales price) is not more than $300,000. You or a member of your family must have definite plans to reside at the property for at least 50% of the number of days the property is used by any person during each of the first two 12-month periods following the date of transfer. When counting the number of days the property is used, do not count the days the property will be vacant.


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Exceptions from FIRPTA Withholding: !!Generally you do not have to withhold in the following situations; however, notification requirements must be met: !

A person buying the property must intend to use it as a home and!

1. The amount realized (generally sales price) is not more than $300,000. !

2. the BUYER or a member of the family must have definite plans to reside (live at) at the property for at least 50% of days the property during each of the first two 12-month periods following sale. !

1. When counting the number of days the property is used, do not count the days the property will be vacant.


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Exceptions from FIRPTA Withholding!!Generally you do not have to withhold in the following situations; however, notification requirements must be met: !2. The property disposed of (other than certain dispositions of non-publicly traded interests) is an ! interest in a domestic corporation if any class of stock of the corporation is regularly traded ! on an established securities market. However, if the class of stock had been held by a ! foreign person who.... beneficially owned more than 5% of the fair market value of that class at ! any time during the previous 5-year period, then that interest is a U.S. real property interest if the ! corporation qualifies as a United States Real Property Holding Corporation (USRPHC), and you ! must withhold on any disposition.


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Exceptions from FIRPTA Withholding - TRANSLATION!!Generally you do not have to withhold in the following situations; however, notification requirements must be met: !2. The property disposed of (other than certain dispositions of non-publicly traded interests) is an interest in a domestic corporation if any class of stock of the ! corporation is regularly traded on an established securities market. However, if the class of stock had been held by a foreign person who beneficially owned more ! than 5% of the fair market value of that class at any time during the previous 5-year period, then that interest is a U.S. real property interest if the corporation ! qualifies as a United States Real Property Holding Corporation (USRPHC), and you must withhold on any disposition.!!

CALL A LAWYER!


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Exceptions from FIRPTA Withholding !!Generally you do not have to withhold in the following situations; however, notification requirements must be met: !4. The transferor gives you a certification stating, under penalties of perjury, that the transferor is not a foreign person and containing the transferor's name, U.S. taxpayer identification number, and home address (or office address, in the case of an entity).!!TRANSLATION - NON FIRPTA - PERSONAL OR ENTITY (CORPORATE) AFFIDAVIT***!!

BUT IF***!Agent knows that the Transferor is lying on his “certification” !

the Agent may later be liable for the tax.


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Exceptions from FIRPTA Withholding !!Generally you do not have to withhold in the following situations; however, notification requirements must be met: !5. You receive a withholding certificate from the Internal Revenue Service that excuses withholding. !!!

Refer to Withholding Certificates to follow.


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Exceptions from FIRPTA Withholding !!Generally you do not have to withhold in the following situations; however, notification requirements must be met: !6. The transferor gives you written notice that no recognition of any gain or loss on the transfer is ! required because of a nonrecognition provision in the Internal Revenue Code or a provision in a ! U.S. tax treaty. You must file a copy of the notice by the 20th day after the date of transfer with the:!

!Internal Revenue Service Center

P.O. Box 409101 Ogden, UT 84409.!


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Exceptions from FIRPTA Withholding !!Generally you do not have to withhold in the following situations; however, notification requirements must be met: !8. The amount the transferor realizes on the transfer of a U.S. real property interest is zero.!!

• NO TRANSLATION REQUIRED (just in case) 0 = 0

• Example of this would be a … A SHORT SALES


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Exceptions from FIRPTA Withholding !!Liability of Agents!!If you receive either of the certifications discussed in item (3) or (4) and the transferor's agent or your agent (the transferee's agent) has actual knowledge that the certification is false, or in the case of (3), that the corporation is a foreign corporation, the agent must notify you, or the agent will be held liable for the tax. The agent's liability is limited to the amount of pay the agent gets from the transaction.!!An agent, is any person who represents the transferor or transferee in any negotiation with another person (or another person's agent) relating to the transaction, or in settling the transaction. A person is not treated as an agent if the person only performs one or more of the following acts related to the transaction:!!

Receipt and disbursement of any part of the consideration,!Recording of any document,!Typing, copying, and other clerical tasks,!Obtaining title Insurance reports and reports concerning the condition of the property, or!Transmitting documents between the parties.!


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Exceptions from FIRPTA Withholding - TRANSLATION !!Liability of Agents!!

DON’T PLAY WITH !UNCLE SAM!

You are an agent !

!


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Withholding Certificates!!The amount that must be withheld from the disposition of a U.S. real property interest can be adjusted pursuant to a withholding certificate issued by the IRS. The transferee, the transferee's agent, or the transferor may request a withholding certificate. The IRS will generally act on these requests within 90 days after receipt of a complete application, including the Taxpayer Identification Numbers (TIN’s) of all the parties to the transaction. A transferor that applies for a withholding certificate must notify the transferee in writing that the certificate has been applied for on the day of or the day prior to the transfer.!

!


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Withholding Certificates - TRANSLATION!!YOU HAVE 90 days after receipt of a complete application, including the (SELLER) Taxpayer Identification Numbers (TIN’s) of all the parties to the transaction. !!YOU must notify the BUYER in writing that the certificate has been applied for on the day of or the day prior to the transfer (SALE).!

!


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Withholding Certificates!!A withholding certificate may be issued due to:!!

A determination by the IRS that reduced withholding is appropriate because either:!1. The amount that must be withheld would be more than the transferor's maximum tax

liability, or!2. Withholding of the reduced amount would not jeopardize collection of the tax,!

The exemption from U.S. tax of all gain realized by the transferor, or!An agreement for the payment of tax providing security for the tax liability, entered into by the transferee or transferor.


GET A LAWYER OR AN ACCOUNTANT OR BOTH

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!DISPOSITION: http://www.irs.gov/Individuals/International-Taxpayers/Definitions-of-Terms-and-Procedures-Unique-to-FIRPTA!!FIRPTA WITHHOLDING: http://www.irs.gov/Individuals/International-Taxpayers/FIRPTA-Withholding!!EXCEPTIONS TO FIRPTA WITHHOLDING: http://www.irs.gov/Individuals/International-Taxpayers/Exceptions-from-FIRPTA-Withholding!!INTERNATIONAL TAXPAYER: http://www.irs.gov/Individuals/International-Taxpayers!FORMS FOR APPLYING:http://www.irs.gov/Individuals/International-Taxpayers/Format-for-Applications!!WITHHOLDING CERTIFICATES:http://www.irs.gov/Individuals/International-Taxpayers/Withholding-Certificates!!Angel Francisco Condom Website: http://www.afc-pa.com


USEFUL LINKS

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http://www.irs.gov/Individuals/International-Taxpayers/Definitions-of-Terms-and-Procedures-Unique-to-FIRPTA

http://www.irs.gov/Individuals/International-Taxpayers/FIRPTA-Withholding

http://www.irs.gov/Individuals/International-Taxpayers/Exceptions-from-FIRPTA-Withholding

http://www.irs.gov/Individuals/International-Taxpayers

http://www.irs.gov/Individuals/International-Taxpayers/Format-for-Applications

http://www.irs.gov/Individuals/International-Taxpayers/Withholding-Certificates

http://www.afc-pa.com


Ask the FIRPTA questions early in your interview of the SELLER.

1. Does the seller know about FIRPTA?

2. Are you a foreign national?

3. Is the property held in your name or a company?

4. Have you got a social security number?

5. If a company look up the company on http://sunbiz.org and find out if they have a “FIN” or “EIN” number. If they do not have this it will need to be ordered before closing.


SECRET TO A SUCCESSFUL FIRPTA CLOSING

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http://sunbiz.org


Ask the FIRPTA questions early in your interview of the BUYER.

1. Is the property under $300,000.00?

2. Does the buyer plan to live on the property over the next two years

3. Does the buyer have a social security number?

4. Would the buyer be willing to provide their tax numbers and sign an affidavit about living on property?

5. Is the buyer purchasing under their own name or a company?



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!!DO NOT DO THE FIRPTA CERTIFICATION or the FIRPTA WITHHOLDING yourself. !

1. The liability is high, the opportunity to make mistakes is high and the customer appreciation is low.!

2. Bringing in an experts that does it right the first time is much more impressive that explaining why something you did went wrong.!

3. Even if the expert you bring in does not do the best job possible, “fire them” and look like a hero.!

4. Experts you bring in to do the work will owe you a referral... ask for it!!

5. Finally: Sellers will expect you to do it for free and will not want to pay you extra, you get all the liability and no credit for your work. You also risk your client’s money and hurting your credibility for no good reason.

ANGEL FRANCISCO CONDOM, P.A.!3650 N.W. 82ND AVENUE, SUITE 308, DORAL FLORIDA 33166 - O (888) 591-0008 - F (888) 818-5999 - E [email protected]


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what realtors need to know about firpta - foreign investment in real property tax act

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