Hit Me FIRPTA One More Time

FIRPTA ‚ÄúTake 2‚ÄĚ


 Cori Lamont  |    August 19, 2020
FIRPTA

As soon as the WB-11 Residential Offer to Purchase (WB-11) was available for optional use on November 1, 2020, real estate firms throughout the state almost immediately started creating and using addenda that modified two specific pieces in the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) provisions:

  • That the seller had to provide the certification of non-foreign status at closing rather than the pre-printed 15 days prior
    to closing.
  • Removed the buyer‚Äôs right to terminate the offer if the seller failed to provide the certification of non-foreign status.

Therefore, because of the large numbers of agents, firms and attorneys throughout the state making modifications to the FIRPTA provisions, the forms committee at the Department of Safety and Professional Services (DSPS) recommended the WB-11 FIRPTA provision be modified, and the WB-11 was reopened for alteration. 

In addition to the modification requiring the seller to complete the certification of non-foreign status no later than closing, and instead of allowing the buyer to have an automatic right to terminate because the seller failed to provide the certification, the buyer has the ability to say the seller defaulted the terms of the agreement. More on those two changes in a bit.

This article focuses only on the WB-11 ‚ÄúTake 2‚ÄĚ and FIRPTA ‚ÄúTake 2‚ÄĚ revisions on lines 513-542 and not the generalities of FIRPTA. See the resource box at the end of this article for more in-depth information about FIRPTA. For a discussion as to the other changes in the WB-11 ‚ÄúTake 2,‚ÄĚ see Debbi Conrad‚Äôs article, ‚ÄúIntroduction to the New Residential Offer ‚ÄėTake 2‚Äô and the Updated Condominium Offer‚ÄĚ on page 6.

Subheadings inserted

One of the simple improvements made to FIRPTA ‚ÄúTake 2‚ÄĚ was to provide subheadings for a more user-friendly read. The following discussion breaks down each of those subheadings.

FOREIGN INVESTMENT IN REAL PROPERTY TAX ACT (FIRPTA)

Section 1445 of the Internal Revenue Code (IRC) provides that a transferee (Buyer) of a United States real property interest must pay or withhold as a tax up to 15% of the total ‚ÄúAmount Realized‚ÄĚ in the sale if the transferor (Seller) is a ‚ÄúForeign Person‚ÄĚ and no exception from FIRPTA withholding applies. A ‚ÄúForeign Person‚ÄĚ is a nonresident alien individual, foreign corporation, foreign partnership, foreign trust, or foreign estate. The ‚ÄúAmount Realized‚ÄĚ is the sum of the cash paid, the fair market value of other property transferred, and the amount of any liability assumed by Buyer.

CAUTION: Under this law if Seller is a Foreign Person, and Buyer does not pay or withhold the tax amount, Buyer may be held directly liable by the U.S. Internal Revenue Service for the unpaid tax and a tax lien may be placed upon the Property.

Seller hereby represents that Seller is a non-Foreign Person, unless (1) Seller represents Seller is a Foreign Person in a condition report incorporated in this Offer per lines 105-108, or (2) no later than 10 days after acceptance, Seller delivers notice to Buyer that Seller is a Foreign Person, in which cases the provisions on lines 530-532 apply.

Seller represents they are a non-foreign person

The FIRPTA ‚ÄúTake 2‚ÄĚ language continues to have the seller represent they are not a foreign person. However, the FIRPTA ‚ÄúTake 2‚ÄĚ now provides that the seller represents they are not a foreign person, unless:

  1. The seller represents that he or she is a foreign person in a condition report incorporated in the offer.
  2. Or, no later than 10 days after acceptance, the seller delivers notice to the buyer confirming the seller is a foreign person.

The WRA’s condition and vacant land disclosure forms will be updated to include a question for the seller to answer as to foreign status, which should help the seller make the representation per item (1). 

If seller is a non-foreign person

IF SELLER IS A NON-FOREIGN PERSON. Seller shall, no later than closing, execute and deliver to Buyer, or a qualified substitute (attorney or title company as stated in IRC § 1445), a sworn certification under penalties of perjury of Seller’s non-foreign status in accordance with IRC § 1445. If Seller fails to timely deliver certification of Seller’s non-foreign status, Buyer shall: (1) withhold the amount required to be withheld pursuant to IRC § 1445; or, (2) declare Seller in default of this Offer and proceed under lines 494-501.

FIRPTA ‚ÄúTake 2‚ÄĚ continues to provide that if the seller is a non-foreign person, the seller shall execute and provide a sworn non-foreign status certification no later than the closing date. Therefore, listing agents who had the practice of providing the WRA‚Äôs or some other version of the non-foreign status certification will no longer need to take that step because the certification will typically be executed at the closing.

FIRPTA ‚ÄúTake 2‚ÄĚ now includes that if the seller failed to timely deliver the certification, then the buyer shall:

  • Withhold the amount required by the Internal Revenue Code (IRC).
  • Or declare the seller in default and proceed under the offer‚Äôs default provisions.

While this new language removed the buyer‚Äôs right to terminate because the seller did not provide the certificate, it still allows the buyer the opportunity to argue the seller did not meet the seller‚Äôs contractual obligation by providing the certification and, therefore, the seller has defaulted and the buyer can proceed under lines 494-496 of the WB-11 ‚ÄúTake 2.‚ÄĚ

(can also include the lines from the WB-11 instead of the highlighted language)
If Seller defaults, Buyer may:
(1) sue for specific performance; or
(2) terminate the Offer and request the return of the earnest money, sue for actual damages, or both.

If seller is a foreign person

IF SELLER IS A FOREIGN PERSON. If Seller has represented that Seller is a Foreign Person, Buyer shall withhold the amount required to be withheld pursuant to IRC § 1445 at closing unless the Parties have amended this Offer regarding amounts to be withheld, any withholding exemption to be applied, or other resolution of this provision. 

If the seller represented that he or she is a foreign person, the buyer shall withhold the IRC amount at closing. However, the language acknowledges the parties may make other arrangements by including the following language: ‚Äúunless the Parties have amended this Offer regarding amounts withheld, any withholding exemption to be applied, or other resolution of this provision.‚Ä̬†

Compliance with FIRPTA

COMPLIANCE WITH FIRPTA. Buyer and Seller shall complete, execute, and deliver, on or before closing, any instrument, affidavit, or statement needed to comply with FIRPTA, including withholding forms. If withholding is required under IRC § 1445, and the net proceeds due Seller are not sufficient to satisfy the withholding required in this transaction, Seller shall deliver to Buyer, at closing, the additional funds necessary to satisfy the applicable withholding requirement. Seller also shall pay to Buyer an amount not to exceed $1,000 for actual costs associated with the filing and administration of forms, affidavits, and certificates necessary for FIRPTA withholding and any withholding agent fees. 

Any representations made by Seller with respect to FIRPTA shall survive the closing and delivery of the deed.

Firms, Agents, and Title Companies are not responsible for determining FIRPTA status or whether any FIRPTA exemption applies. The Parties are advised to consult with their respective independent legal counsel and tax advisors regarding FIRPTA.

If withholding is required under the IRC, and net proceeds are due to the seller, FIRPTA ‚ÄúTake 2‚ÄĚ provides that if the net proceeds are not sufficient to satisfy the withholding, the seller shall deliver additional funds necessary to the buyer at closing. Further, FIRPTA ‚ÄúTake 2‚ÄĚ now includes language that the seller shall also pay the buyer an amount not to exceed $1,000 for actual costs associated with the filing, administration of forms, affidavits and other items necessary for FIRPTA.

Lastly, FIRPTA ‚ÄúTake 2‚ÄĚ acknowledges that representations made by the seller as to FIRPTA survive the closing and delivery of the deed.

Practice impact of FIRPTA “Take 2"

Under the FIRPTA ‚ÄúTake 2‚ÄĚ language, listing agents are no longer encouraged to provide the seller a copy of the WRA‚Äôs non-foreign status certification. Instead, under the FIRPTA ‚ÄúTake 2‚ÄĚ language, the seller will complete the certification no later than closing, which means the title company or some other entity or person serving as the qualified substitute will likely have the seller execute the certificate at closing. Additionally, the listing agent could consider alerting the title company when title is ordered that the seller needs to complete the certification.

Cori Lamont is Senior Director of Legal and Public Affairs for the WRA.

FIRPTA Resources

WRA Forms Update Resource Webpage: www.wra.org/formsupdate

“The Best of the Legal Hotline: FIRPTA" in the December 2019 Wisconsin Real Estate Magazine: www.wra.org/WREM/Decc19/Hotline

IRS Exceptions from FIRPTA Withholding: www.irs.gov/individuals/international-taxpayers/exceptions-from-firpta-withholding

Full FIRPTA provision

FOREIGN INVESTMENT IN REAL PROPERTY TAX ACT (FIRPTA) Section 1445 of the Internal Revenue Code (IRC) provides that a transferee (Buyer) of a United States real property interest must pay or withhold as a tax up to 15% of the total ‚ÄúAmount Realized‚ÄĚ in the sale if the transferor (Seller) is a ‚ÄúForeign Person‚ÄĚ and no exception from FIRPTA withholding applies. A ‚ÄúForeign Person‚ÄĚ is a nonresident alien individual, foreign corporation, foreign partnership, foreign trust, or foreign estate. The ‚ÄúAmount Realized‚ÄĚ is the sum of the cash paid, the fair market value of other property transferred, and the amount of any liability assumed by Buyer.

CAUTION: Under this law if Seller is a Foreign Person, and Buyer does not pay or withhold the tax amount, Buyer may be held directly liable by the U.S. Internal Revenue Service for the unpaid tax and a tax lien may be placed upon the Property.

Seller hereby represents that Seller is a non-Foreign Person, unless (1) Seller represents Seller is a Foreign Person in a condition report incorporated in this Offer per lines 105-108, or (2) no later than 10 days after acceptance, Seller delivers notice to Buyer that Seller is a Foreign Person, in which cases the provisions on lines 530-532 apply. 

IF SELLER IS A NON-FOREIGN PERSON. Seller shall, no later than closing, execute and deliver to Buyer, or a qualified substitute (attorney or title company as stated in IRC § 1445), a sworn certification under penalties of perjury of Seller’s non-foreign status in accordance with IRC § 1445. If Seller fails to timely deliver certification of Seller’s non-foreign status, Buyer shall: (1) withhold the amount required to be withheld pursuant to IRC § 1445; or, (2) declare Seller in default of this Offer and proceed under lines 494-501. 

IF SELLER IS A FOREIGN PERSON. If Seller has represented that Seller is a Foreign Person, Buyer shall withhold the amount required to be withheld pursuant to IRC § 1445 at closing unless the Parties have amended this Offer regarding amounts to be withheld, any withholding exemption to be applied, or other resolution of this provision. 

COMPLIANCE WITH FIRPTA. Buyer and Seller shall complete, execute, and deliver, on or before closing, any instrument, affidavit, or statement needed to comply with FIRPTA, including withholding forms. If withholding is required under IRC § 1445, and the net proceeds due Seller are not sufficient to satisfy the withholding required in this transaction, Seller shall deliver to Buyer, at closing, the additional funds necessary to satisfy the applicable withholding requirement. Seller also shall pay to Buyer an amount not to exceed $1,000 for actual costs associated with the filing and administration of forms, affidavits, and certificates necessary for FIRPTA withholding and any withholding agent fees. 

Any representations made by Seller with respect to FIRPTA shall survive the closing and delivery of the deed.

Firms, Agents, and Title Companies are not responsible for determining FIRPTA status or whether any FIRPTA exemption applies. The Parties are advised to consult with their respective independent legal counsel and tax advisors regarding FIRPTA. 

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