Legal Matters is a regular column intended to address general legal concerns. Since every client walks in the door with a different set of circumstances, you should not rely on this column to provide specific legal advice. If you are in need of specific legal advice, please consult with an attorney; he or she will provide advice that is unique and tailored to your legal needs.
Since a large percentage of Ellicottville’s real estate transactions involve Canadian citizens, there are a few issues related to the Foreign Investment in Real Property Tax Act (FIRPTA) that I think might be helpful to know going into a sale.
I should preface this article by stating that tax-related questions are often very specialized and may require individual consideration. Any substantive tax questions require the advice of a CPA or an attorney who holds a Masters in Tax Law (ML, Tax) in addition to her Juris Doctorate (JD).
FIRPTA requires foreign sellers to report their capital gains and other income on real property with the IRS. The requirement is a burden placed on the buyer to withhold 10 percent of the purchase price, to be transferred to the IRS and then refunded to the seller if the 10 percent is in excess of the actual tax owed. No withholding is required, however, if the home is: (1) a residential purchase, (2) the purchase price is not more than $300,000, and (3) the buyer plans to use the property for at least half of the time the property is actually used during each of the first two 12-month periods following closing (i.e. the property probably won’t be used for rental income).
Fortunately, most property sold in Ellicottville is residential; thus, as long as the purchase price is no more than $300,000 and buyer will use it more than half the time it’s used, the seller will avoid withholding. In the event that buyer cannot meet these exceptions, there are a few procedural steps that parties can take to prepare for a FIRPTA related sale — and hopefully reduce the withholding amount and the amount of time the money is actually withheld.
As soon as a foreign seller accepts an offer to purchase from a buyer, the seller should complete and file with the IRS an application for a withholding certificate (IRS Form 8288-b). The application is a request to lower the 10 percent withholding, and the IRS usually responds to the request within 90 days.
Although it is buyer’s obligation to withhold, it is seller’s obligation to inform buyer of a pending withholding certificate. He should do this by providing the buyer or his attorney with a copy of the application as soon as possible but absolutely prior to closing.
If seller provides proof of application, buyer’s attorney is still required to withhold the 10 percent but doesn’t need to remit the amount until she is noticed that the certificate has been either denied or issued. Once the certificate is issued or denied, buyer’s attorney has 20 days to remit the amount indicated by the IRS — either the 10 percent, if denied, or the lesser determined amount, if issued.
Without written confirmation of, or a copy of, the application for a withholding certificate, buyer’s attorney is required to withhold and remit the full 10 percent within 20 days of closing. Seller must then wait until the following tax year to file a tax return with the IRS.
It is important for sellers to apply for the withholding certificate as soon as they have a signed contract and to inform buyers that the application has been made. Both parties need to put their attorneys on notice so that the proper post-application paperwork is prepared in anticipation of, and after, closing.
FIRPTA-related concerns are increasingly common in Ellicottville and the Southern Tier as we see more and more Canadian property owners. As such, Peters & Moriarty is in the process of organizing a seminar for property owners in the area. Seminar presenters will include Canadian and American CPAs with extensive cross-border experience. Although our website is in the process of being updated, please check back for seminar dates and locations.