Important Changes to FIRTPA!
All property sales by foreign nationals are subject
to a 10% withholding at closing unless the seller and the Realtor have planned for this
problem. We at Access USA Realty recommend that all foreign nationals
who are buying or selling property in the USA consult with US tax
experts. We can provide you with a list of registered tax experts
who can assist you.
A little planning can save thousands of dollars, prevent delays
and ensure that your closing goes smoothly.
RE : CHANGES TO F.I.R.P.T.A.
DATE : NOVEMBER 12, 2003
On August 4, 2003, the Internal Revenue Service (the “IRS”)
issued final regulations, which require changes in closing procedures
for real estate transactions involving foreign Sellers. When
you learn that the Seller (simply by virtue of being a nonresident)
is or may be subject to the provisions of the Foreign Investment
In Real Property Tax Act of 1980 (“FIRPTA”), WE SHOULD ENCOURAGE
OUR CLIENTS TO RETAIN THE SERVICES OF A CERTIFIED PUBLIC ACCOUNTANT
OR TAX ATTORNEY TO REVIEW AND DISCUSS THE APPLICATION AND POTENTIAL
CONSEQUENCES OF FIRPTA TO THEIR PARTICULAR SITUATION.
BACKGROUND
Sale of a U.S. Real Property Interest
(“USRPI”) by a foreign person is subject to FIRPTA. Congress passed FIRPTA to “level
the playing field” so that foreigners would not profit handsomely
and free of tax on U.S. real estate investments while their counterparts,
U.S. citizens and residents, suffered the full brunt of the tax
laws.
A USRPI is broadly defined to include any direct or indirect
right to receive gain in value of U.S. real estate. Tangible
property sold with the real property is also considered a USRPI.
Under the provisions of FIRPTA, when a foreign owner sells a
USRPI, the Buyer MUST withhold ten percent
(10%) of the gross sales price at closing and send the withheld
amount to the IRS within twenty (20) days after the closing. Please note that it
is the BUYER who is responsible for this withholding tax obligation
and who is personally liable for failure to withhold. This is
why the closing agent must collect the 10% withholding tax at
closing. This issue is non-negotiable – a buyer or closing agent
cannot risk assuming this tax obligation if there is no available
exception to the withholding requirement!
Non-residents are required to file a return and pay tax on the
gain. The gain is the difference between the selling price and
the seller's cost basis in the property. The seller's cost basis
is the original purchase price plus additional items, including,
but not limited to, certain closing costs on the original purchase,
commissions and other sale expenses, plus capital improvements
to the property. Because the actual gain and corresponding tax
is not known at the time of the sale, it was thought that withholding
10% of the sales price would encourage compliance. Sometimes,
the 10% amount withheld under FIRPTA will exceed the actual tax
on gain that will be due when a return is filed.
For example,
if the gross sales price of a single family home is $500,000.00,
the closing agent is required to withhold $50,000 and remit
this amount to the IRS. Assuming that the actual tax on the gain
is less than $50,000, the seller would have to file a return
to obtain a refund. If the sale occurred in January of 2003,
the seller would have to wait until January 1, 2004 to file a
2003 income tax return and request a refund. To avoid this unpleasant
and unnecessary situation and to avoid excess withholding when
the required amount exceeds the tax actually due, the Seller
may file an application for a withholding certificate with
the IRS prior to closing (Form 8288-B). In the application the
Seller substantiates to the IRS that the actual tax that will
be due when a return is filed is less than the amounts required
to be withheld at closing. At the closing, if the Seller provides
the Buyer/closing agent with proof that the Seller has applied for
a withholding certificate, the Buyer/closing agent is still required
to withhold the mandatory 10% of the gross sales price, but these
funds can be kept in the trust account of the closing agent pending
receipt of the IRS approval or denial of the application.
The
IRS is supposed to make its determination within ninety (90)
days of its receipt of the application. Of course, if the
IRS approves a lesser amount of withholding, then within 20 days,
the closing agent will send the lesser amount to the IRS
and refund the balance directly to the Seller. This is a very
important and advantageous procedure which should be fully considered
and utilized by clients, under the guidance of a certified public
accountant or tax attorney, if at all possible. It is important
to note that this is one of the most important areas of FIRPTA
which has been effected by the new regulations as discussed
below. NEW REGULATIONS
Non-residents have always been required to obtain a taxpayer
identification number (“TIN”) before they can file a tax return.
This is similar to a social security number, but begins with
“9”, and is used to identify the taxpayer. In order to obtain
a TIN, a non-resident has to complete an application (Form W-7)
and send the application to Philadelphia, PA., along with proof
of identification, such as a passport, birth certificate, and/or
drivers license. Original or certified copies of these important
documents are required, and it takes on average, 90 days for
the IRS to assign a TIN and return the original documents.
In the past, it was not necessary to have a TIN to submit an
application for reduced withholding. Under
the new regulations, a foreign person is required to provide
a TIN at the time of filing any return or statement, including
an application for withholding certificate, for the disposition
of a USRPI occurring after November 3, 2003. The IRS has commented that it will not
process a withholding certificate application which does not
include the TIN of the Seller and, if applicable, the foreign
Buyer, and will deny such application or at least deem the application
temporarily incomplete without the inclusion of the TIN's.
WHAT THIS MEANS TO AMERICAN REAL ESTATE AGENTS .
Often, foreign owners are unaware of withholding requirements
or the requirement to provide a TIN until immediately prior to
closing, which does not give the client much opportunity to address
the issue. If you represent foreign Buyers, it is a good time
to make them aware of FIRPTA so that they may consult with a
professional to discuss the advisability of filing for a TIN
well in advance of any considerations to sell the property. There
is no risk or jeopardy for the seller to obtain a TIN! If the
client is a Seller, the earlier you identify these issues, the
better – certainly at or before execution of the contract and
preferably, upon listing of the property. The more time our clients
have to consider the ramifications of FIRPTA, the more options
they may have available to them. Remember that withholding under
FIRPTA may seriously impact your closing, especially if the proceeds
of sale are marginal. We have had incidents where, because of
FIRPTA, the Seller was required to bring additional cash to closing
just to satisfy the 10% withholding requirement! Please do not
make this mistake, because sometimes, the Seller is not going
to be able to make up the difference and it will jeopardize the
closing!
Foreigners are required to file a tax return to report the sale
even if no tax is due. When the sale occurs during the year may
influence the seller's decision whether or not to file an application
for reduced withholding. For example, assuming the sale is late
in the year, it might not be worth the effort or cost to prepare
the application. But this should be a decision made by the seller
only after consultation with a professional with expertise in
this area!
A final consideration is what happens in the event that a Seller,
or foreign Buyer, fails or refuses to provide their TIN as required
by these regulations? If a foreign Buyer
fails to provide a TIN to the Seller in time to allow the Seller
to file for a withholding certificate before closing, the Seller
might be damaged. It is
conceivable that a Buyer might use the TIN filing requirement
as leverage to force concessions from a Seller, especially if
the Seller had to come up with extra cash at closing to comply
with the FIRPTA withholding requirement. Similarly, the foreign
Buyer may have exposure if the Seller fails or refuses to timely
provide a TIN following closing to avoid penalties for late remittance
of the withheld amount and late filing of Form 8288. The regulations
do not provide sanctions for failure to provide a TIN on a timely
basis. In such cases, we may have to consider inserting into
our contract a clause providing a specific representation by
a party to provide a TIN and possible sanctions if a party does
not timely provide the TIN. This is for our clients ultimate
protection.
If you believe that you may have a FIRPTA issue, please contact
us. If our client is in need of professional assistance and does
not have an attorney or CPA, we will recommend the services of,
and make arrangements for our clients to speak directly with:
Miami-Dade County
Broward County
- Jeffrey L. Rubinger, an associate at Holland+Knight
- Jeffrey
B. Kahn, P.A., Esq., CPA, LLM (Tax)
- Eric
D. Rosenberg, P.A.
- Thomas O. Katz, a member of
Ruden,
McClosky, Smith, Schuster & Russell, P.A.
Palm Beach County
Those
firms has been approved by the IRS as a processing
agent for TIN applications. Therefore, if an application
is prepared by them, it is not necessary for the applicant
to send original identification documents with the
W-7 application to the IRS in Philadelphia. More importantly,
having a tax professional assist you in these matters will take
pressure off we can focus on servicing our clients through the
transaction. The sooner you identify a potential FIRPTA issue
and have it reviewed by a professional, the more effective
you will be. Our clients appreciate our efforts!
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