The Best of the Legal Hotline: FIRPTA


 Tracy Rucka  |    December 09, 2019
Best of the Legal Hotline

With the November 1 optional use date now in effect for the 2020 version of the WB-11 Residential Offer to Purchase and the mandatory use date approaching on January 1, the WRA Legal Hotline has received inquiries from WRA members regarding the new FIRPTA provision in the new WB-11.

While this article highlights several recent FIRPTA-related discussions on the hotline, licensees must always refer the parties to their tax advisers or legal counsel with specific questions regarding compliance with FIRPTA. The following general information is provided for context and is not to be considered tax advice.

A new law for foreign persons?

Is there a new law that states that a foreigner has to pay $15,000 to buy or sell property in the U.S.? 

No. Buyers purchasing a property from a person classified as a ‚Äúforeign person‚ÄĚ are subject to the federal tax law provisions of the Foreign Investment in Real Property Tax Act (FIRPTA). Although these transactions are infrequent, there can be significant adverse consequences for buyers who do not comply with FIRPTA, and there have been incidences where the blame ‚ÄĒ and the penalties ‚ÄĒ for noncompliant buyers was shifted to real estate agents, primarily because the agents did not alert the buyers to FIRPTA. Accordingly, Wisconsin is following the example set by several other states, including Minnesota, in including a FIRPTA provision in the 2020 version of the WB-11 Residential Offer to Purchase on pages 9-10 of the form.

FIRPTA is tax law. FIRPTA is about the Internal Revenue Service (IRS) taxing foreign persons selling United States real estate. The IRS’ concern is that foreign persons will sell their property and leave the country without paying the tax due on the sale. The IRS solution is to make the buyer responsible for making sure the tax is collected because the buyer will still be here, and the buyer will have an identifiable asset that can be attached with a lien if need be, that is, the property.

FIRPTA, as stated in ¬ß 1445 of the Internal Revenue Code (IRC), provides a buyer must pay or withhold as a tax up to 15 percent of the total amount realized in the sale if the seller is a ‚ÄúForeign Person,‚ÄĚ and no exception from FIRPTA withholding applies. A foreign person is a nonresident alien individual, foreign corporation that has not elected to be treated as a domestic corporation, foreign partnership, foreign trust or foreign estate. It does not include a resident alien individual. U.S. green card holders, U.S. citizens and noncitizens who fulfill the requirement of the substantial presence test are not subject to FIRPTA.

If the seller is a foreign person, and the buyer does not pay or withhold the tax amount, the IRS may hold the buyer liable for the unpaid tax, and a tax lien may be placed upon the property to secure payment.

One exemption is for the seller to provide a sworn certification under penalties of perjury regarding his, her or its nonforeign status in accordance with IRC § 1445. 

See the WRA’s forms update resource page at www.wra.org/formsupdate regarding the 2020 WB-11 Residential Offer to Purchase and the FIRPTA provision.

Social Security numbers

What if the seller does not put his or her Social Security number on the certification? Would the certification still be valid?

The offer to purchase provides the seller will comply with IRS § 1445 provisions. To comply with IRS rules, the identification number, such as the SSN, is required for completion of a certification of nonforeign status. For the buyer to rely on the seller’s certification of nonforeign status, and to comply with other requirements, the identification number would be required. See the following information from the IRS Exemptions from FIRPTA Withholding at www.wra.org/FIRPTAwithholding.

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).
5. The transferror can give the certification to a qualified substitute. The qualified substitute gives you a statement, under penalties of perjury, that the certification in the possession of the qualified substitute.

While researching FIRPTA information, a licensee found a seller certification form from another state. That form included ‚Äúto be provided at closing‚ÄĚ written on the Social Security number line. Would this be sufficient in a Wisconsin transaction to satisfy the contingency? While the licensee understands the seller can provide the form directly to the title company, the licensee is trying to determine if there are alternative options rather than writing down the Social Security number.¬†

The 2020 WB-11 Residential Offer to Purchase provides on lines 526-528 that, ‚ÄúNo later than 15 days prior to closing, Seller shall execute and deliver to Buyer, or a qualified substitute (attorney or title company as stated in IRC ¬ß 1445), a sworn certification under penalties of perjury of Seller‚Äôs non-foreign status in accordance with IRC ¬ß 1445.‚ÄĚ Unless the offer is modified, the seller is agreeing to provide the form by the stated date. If the seller does not include the Social Security number, the seller has not fulfilled the terms of the contract, and the buyer may withhold from the seller‚Äôs proceeds or terminate the offer.¬†

Timelines

The licensee would like to write the following in additional provisions, ‚ÄúRegarding line 526 of this Offer, ‚ÄėNo later than 15 days prior to closing‚Äô is hereby changed to ‚ÄėWithin 5 days of acceptance.‚Äô‚ÄĚ Are there any issues with this?

The 15-day timeline may be modified, as it is a contractual agreement and not a statutory requirement.

Amount realized

The offer states ‚Äúthe amount realized‚ÄĚ is the sum of cash paid, the fair market value of other property transferred, and the amount of any liability assumed by the buyer. A licensee heard that title companies will be using the sales price as the amount realized. Is there anywhere in writing that states the sales price can be used to figure out the amount the buyer needs to withhold, for example, 10 percent of the sales price?

The title companies and parties may consult with counsel about defined terms such as the ‚Äúamount realized.‚ÄĚ The IRS‚Äô webpage regarding definitions of terms and procedures unique to FIRPTA at www.wra.org/DefinitionsFIRPTA, includes the following definition of amount realized:¬†

The Amount Realized by the transferor 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. 

Foreign Person status

When would a buyer find out about a seller being a foreign person?

As of the date of publication, information about the seller being a foreign person is not included in the Real Estate Condition Report (RECR). It is anticipated that the Wisconsin statute relating to real estate condition reports and vacant land disclosure reports, Wis. Stat. Chap. 709, will be updated to include such information in future versions of the RECR and VLDR. The state-approved 2020 WB-11 Residential Offer to Purchase includes a statement whereby the seller represents that the seller is not a foreign person for purposes of FIRPTA.  A seller who is a foreign person may make an affirmative disclosure to the listing firm. Any offer could then be modified or countered to address compliance with the IRC.

One seller is a citizen and the other is a green card holder. Do these sellers qualify to execute a seller certification of non-foreign status?

Under the IRC and FIRPTA, a ‚ÄúForeign Person‚ÄĚ is a nonresident alien individual, foreign corporation that has not elected to be treated as a domestic corporation, foreign partnership, foreign trust, or foreign estate. It does not include a resident alien individual.

An alien is any individual who is not a U.S. citizen or U.S. national. In general terms, a nonresident alien is an alien who does not pass the green card test, the substantial presence test, or the first-year election test. Generally speaking, U.S. citizens, U.S. green card holders, and noncitizens who fulfill the requirement of the substantial presence test are not subject to FIRPTA.

While these general rules and observations help give licensees a sense of what is involved with the concept of a Foreign Person, under no circumstances should a licensee give a legal, federal tax law opinion regarding whether a particular individual or entity is or is not a Foreign Person. That would constitute the unauthorized practice of law and violate license law. Such questions should always be directed to the party’s legal or tax counsel.

Read about the Green Card Test and the Substantial Presence Test at www.wra.org/GreenCardTest, the Substantial Presence Test at www.wra.org/SubstantialPresence, and the Alien Residency ‚ÄĒ Green Card Test at www.wra.org/AlienResidencyTest. Also see IRS Topic No. 851, Resident and Nonresident Aliens, at www.irs.gov/taxtopics/tc851.

Qualified substitutes

A title company, acting as a Qualified Substitute, forwards the buyer a copy of the seller’s certification of non-foreign status with the Social Security Number redacted. Will this satisfy the IRC’s criteria for FIRPTA?

Under the FIRPTA provision in the offer, the seller agrees to provide the certification that can go to the title company so that no licensee or party would see it and the title company, as the Qualified Substitute, would in turn provide a certification to the buyer ‚ÄĒ perhaps sent to the buyer‚Äôs agent ‚Äď indicating that the seller‚Äôs certification is in its possession. If this does not happen, then the buyer may withhold proceeds or terminate the offer unless it is amended to provide another solution.

FIRPTA allows the seller to give the Seller’s Certification of Non-Foreign Status to a Qualified Substitute, such as the title company, so the seller does not have to give the seller’s taxpayer identification information to the buyer. Once the Qualified Substitute receives the seller’s certification, the Qualified Substitute must furnish a Qualified Substitute Statement to the buyer stating, under penalty of perjury, that the Qualified Substitute has the seller certification in its possession. The Qualified Substitute must then retain the seller certification for five years. 

The Qualified Substitute does not certify the accuracy of the certification; only that it is in their possession. This Qualified Substitute Statement could be delivered to the real estate agent working with the buyer or to the buyer or both since it will not contain any Social Security numbers or other sensitive information.

Providing a redacted copy of the seller’s certification does not comply with IRC § 1445, comply with the FIRPTA provision in the offer, excuse the buyer from FIRPTA withholding, or protect the buyer from liability to the IRS for a foreign seller’s unpaid tax.

More information about FIRPTA is available in the November 2019 Legal Update, ‚ÄúWB-11 Residential Offer to Purchase ‚ÄĒ 2020 Edition ‚ÄĒ Part 3,‚ÄĚ at www.wra.org/LU1911 and the video and flowchart found at www.wra.org/FormsUpdate.

Questions regarding the applicability of FIRPTA require the parties to consult with tax advisers or legal counsel. Real estate firms should work with the title companies to establish a process for complying with the FIRPTA provision including any preferred form to use, method of transmittal and timing. Information from the IRS regarding FIRPTA is available at www.irs.gov/individuals/international-taxpayers/firpta-withholding. Additional information from the National Association of¬† REALTORS¬ģ is available at www.nar.realtor/foreign-investment-in-real-property-tax-act-firpta.¬†

Tracy Rucka is Director of Professional Standards and Practices for the WRA. 

 

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