Under the revised FR/BAR contract forms, Section 18 Standard V replaces the FIRPTA RIDER previously known as Rider I. Apparently, agents were neglecting to incorporate Rider I into the Contract when the seller was a “foreign person” under the Foreign Investment in Real Property Tax Act (“FIRPTA”). With the increase in transactions involving foreign sellers coupled with the aforesaid, the Attorney/Realtor Committee decided to incorporate the FIRPTA language directly into the standard contract forms. In addition to adding the new FIRPTA Standard, the FIRPTA disclosure was expanded to require a seller to notify the buyer in writing if seller is a foreign person. Although there is no time requirement for seller to notify the buyer, it is important that the seller notify the buyer and closing agent in the beginning of the transaction to avoid the parties having to scramble to comply with FIRPTA by closing.
If the seller is a foreign person under FIRPTA, the buyer is required to withhold 10% of the purchase price at closing and submit the 10% to the Internal Revenue Service (“IRS”) within 20 days of closing, unless an exemption applies. For instance, if the sales price is $300,000 or less and the buyer (including buyer’s family members) intends on occupying the property for at least 50% of the time the property is occupied during the first 2 twelve month periods, then the buyer does not need to withhold the 10%. You don’t include the time period that the property is unoccupied. For instance, if for the first 2 years, the buyer intends on occupying it for the month of December and renting it out for 2 weeks in November, the buyer would satisfy the occupancy requirement. If the buyer is a corporation, estate, trust or some other type of entity, the $300,000 exemption cannot be used since the buyer has to be an individual under this exemption. When the parties are relying on the $300,000 exemption, the buyer must sign a form at closing stating same. As now reflected in the contract, the buyer should consult with an attorney and/or tax advisor concerning buyer’s risks when using this exemption.
Another exemption is if the foreign seller has applied for a withholding certificate from the IRS. If the actual tax the seller will owe the IRS is substantially less than the 10%, the seller will probably want to apply for a withholding certificate. The seller has to apply no later than the closing date. The IRS will then issue a withholding certificate stating the amount that needs to be submitted to the IRS which could be 0 if the seller has incurred a loss on the sale. It usually takes on the average 90 days for the IRS to issue the withholding certificate. As a result, frequently the withholding certificate has not been issued by closing in which event the 10% is escrowed at closing pending receipt of the withholding certificate by the IRS. Now under the revised contract, at buyer’s option, buyer can submit the 10% directly to the IRS right after closing if the withholding certificate has not been issued by the IRS, or escrow the 10% at seller’s expense with an escrow agent selected by buyer. Therefore, when working with foreign sellers that plan on applying for a withholding certificate, the contract needs to be amended to remove buyer’s ability to be able to send the 10% into the IRS if the withholding certificate has not been issued by closing.
As always, if you have any questions about transactions involving foreign sellers, we urge you to consult with your real estate attorney.
This communication is not intended to establish an attorney client relationship, and to the extent anything contained herein could be construed as legal advice or guidance, you are strongly encouraged to consult with your own attorney before relying upon any information contained herein.
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