Real estate trends
FIRPTA (Foreign Investment in Real Property Tax Act) Withholding is the Withholding of Tax on Dispositions of United States Real Property Interests
The disposition of a U.S. real property interest by a foreign person (the transferor) is subject to the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) income tax withholding.
FIRPTA authorized the United States to tax foreign persons on dispositions of U.S. real property interests.
Persons purchasing U.S. real property interests (“transferee”) from foreign persons, certain purchasers’ agents, and settlement officers are required to withhold 15% of the amount realized.
Withholding is intended to ensure U.S. taxation of gains realized on disposition of such interests. The transferee/buyer is the withholding agent. If you are the transferee/buyer you must find out if the transferor is a foreign person. If the transferor is a foreign person and you fail to withhold, you may be held liable for the tax.
One of the most common exceptions to FIRPTA withholding is that the transferee (purchaser/buyer) is not required to withhold tax in a situation in which the purchaser/buyer purchases real estate for use as his home and the purchase price is not more than $300,000. However, buyers should be aware that while they may meet the withholding exemption they are still responsible for the seller’s tax liability, interest and penalties should the seller not file a US income tax return to report the sale and pay any relevant taxes.
Note to Non-Resident Buyers – If you purchase property from a non-resident seller and an exception to FIRPTA withholding does not apply then you must ensure that FIRPTA is satisfied as part of the closing. Check your settlement statement prior to closing where you should see 15% of the sales price withheld on the seller’s side of the settlement statement. Request a copy of the withholding certificate from the closing agent and, if withholding was calculated, request a copy of forms 8288, 8288-A and front and back of cancelled check. Retain these documents in a safe place along with your settlement statement and other closing documents.
Foreign Investment in Real Property Tax Act (FIRPTA) Withholding
U.S. Tax law requires that a non-resident alien who sells an interest in U.S. real property is subject to withholding, for tax purposes, of 15% of the gross sales price (i.e. $45,000 on a property with a sales price of $300,000). The withheld amount is required to be forwarded to the IRS, by the Closing Agent, within 20 days of the date of closing. These funds are held until the IRS is satisfied that all taxes due by the non-resident are paid. In order to apply for a refund you can either:-
File U.S. tax returns for each year that rental income was received, reporting all income and expenses; file a final U.S. tax return in the year following the year of sale, to report the sale and recover the balance of cleared funds. This process can take up to eighteen months depending on when, during the tax year, the property is sold.
File prior year tax returns (where required) plus an application for early release of cleared withholding on or before the date of closing. By making this submission, the 10% withholding remains with the Closing Agent whilst the IRS processes the Withholding Application and issues a Withholding Certificate for the cleared funds – usually around 90 days.
Please note that applying for and receiving a Withholding Certificate does not eliminate your requirement to file a final U.S. income tax return to report the sale transaction. In fact, when your final tax return is filed you may receive a further tax refund depending on the number of owners and length of time that the property was held.
In order to ensure a timely release of your funds it is extremely important that the following is obtained PRIOR to closing:-
Buyer’s names, address and SSNs – if U.S. Citizens
Buyer’s names, address and ITINs – if non residents
Or, if the buyers are non residents and do not have ITINs, the buyer’s completed Form W-7 (one per buyer) and authenticated copy of the picture page of their passport(s)
Without this information the Application for a Withholding Certificate and early refund will be rejected. We suggest that you request your Realtor prepare your sales contract contingent upon the buyers providing the above information.
Who’s responsible for FIRPTA withholding on the sale of U.S. property?
Foreign Investment in Real Property Tax Act (FIRPTA) was established in 1980 to ensure the withholding of estimated amount of taxes which may be due on the gain from the disposition or transfer of a U.S. real property interest from a foreign person.
If you purchase U.S. real property from a foreign individual or corporation then you are required to make sure that the seller pays any taxes due on the property. The buyer must execute or have executed the correct forms including the sellers name, address and social security number or individual taxpayer identification number. 15% of the gross sales price must be withheld and submitted to IRS or held in escrow whilst an application for reduced FIRPTA withholding is timely filed and processed.
If the buyer does not take care of the withholding and the seller is a foreign entity who leaves without paying their tax then 15% will be taken from the buyer.
Most buyers are unaware that it is their responsibility to determine if the transferor/seller is a foreign person and subject to FIRPTA withholding. In reality, the settlement agent (Title Company or Attorney) may be instructed to deduct the 15% and submit to IRS or hold in escrow whilst an application for reduced FIRPTA withholding is submitted to IRS for processing.
Any responsible buyer wants to know everything about the home they’re buying before signing on the dotted line. After all, this is probably the biggest purchase you will ever make, so due diligence is a must. The majority of the real estate agents in Florida are Transactional Agents and do not owe the Buyer a fiduciary duty, An Exclusive Buyer Agent does and will work for the buyer to determine all the information known about the property and advise you on inspections, permit searches, etc. Reviewing the Seller’s Disclosure is the first step in this process.
A Seller’s Disclosure in the State of Florida Is a standard form that is essentially a checklist in which a seller indicates the condition of the different features of a property, any known problems affecting the property, and any pending legal issues. This could include things like knowledge of lead-based paint, water damage, pest damage, past repairs, past insurance claims, any history of property line disputes, etc.
Typically, a seller’s disclosure form is filled out by the seller along with their listing paperwork. When buyer’s agents go into the Multiple Listing Service (MLS) to look up potential properties for their clients, that disclosure statement should be available or can be requested from the listing agent.
I am increasingly running into situations wheretransactional brokerage firms are taking the position that since a Seller’s Disclosure is NOT required by law that are not asking the sellers of their listings to fill one out. The first line of the SPDR provides “Notice to Licensee and Seller”; the less they know, the easier it is to make a “deal”. They are relying on the fact that other transactional agents working with buyers will feel the same and not ask for a Sellers Disclosure.
Although sellers aren’t required to complete this specific SPDR form, a residential seller does have to comply with the rule established in Johnson v. Davis. In that case, the Florida Supreme Court held that “where the seller of a home knows of facts materially affecting the value of the property which are not readily observable and are not known to the buyer, the seller is under a duty to disclose them to the buyer.” These material facts are sometimes referred to as latent defects. In addition, in Rayner vs. Wise Realty Co. of Tallahassee, the First District Court of Appeal provided that this same disclosure requirement applies to residential properties that are being sold as is.
In cases were the listing agent does not provide a Sellers Disclosure I request that the Seller answer all my questions in writing and provide a comprehensive list of questions that encompasses everything asked on the SPDR and more.
A seller’s disclosure form is NOT a substitute for a home inspection. Remember, sellers are required to disclosure only problems they know about. Most homeowners don’t go in their attic very often, and have probably never been up on their roof, and they aren’t required to do so before filling out the disclosure. While this document can provide a lot of valuable information, the home inspection is another layer of protection for a buyer.
The importance of this disclosure statement is just one of the many reasons why it’s critical for buyers and sellers to use an Exclusive Buyer Agent ( EBA) during any real estate transaction. EBAs are up-to-date on the latest laws and regulations and are very experienced with the complex documents and paperwork. They can help walk buyers through the disclosure so they understand all aspects of the home they’re buying and recommend the appropriate home inspections ( WDO, Radon, Leak Testing, Mold, and more) to ensure that any hidden defects are found in advance of the purchase.
World events are conspiring to make it more expensive for you to borrow money to buy a house.
Mortgage rates have increased for six consecutive weeks, according to Bankrate data, bringing interest on a 30-year fixed rate loan to 4.44 percent—the highest level in 11 months—while home prices continue to rise due to a lack of available homes.
After years of tepid economic growth, inflation and wage growth recently found a groove, while the Federal Reserve’s plan to raise short-term interest rates multiple times for a consecutive year has reduced the value of government debt.
Homebuyers Should Get off the Fence
Mortgage rates are moved by the yield on 10-year Treasuries, rather than short-term rate hikes by the Fed. That’s why mortgage rates fell throughout 2017, for instance, even as the central bank raised the federal funds rate three times. Rates remain cheap, however, compared to historical prices. A 30-year fixed-rate mortgage came with an interest rate above 6 percent just before the Great Recession in 2007. Potential homeowners should get off the fence and make a bid, assuming you have an affordable home target and adequate savings, because rates are likely only heading north.
Mortgage rates are expected to climb in 2018, so it might be worth shopping for a mortgage before this long period of low rates takes a turn.
Here are several predictions from the largest housing and mortgage groups for the 30-year fixed-rate mortgage:
The Commerce Department reported that January Housing Starts jumped 9.7 percent from December to an annual rate of 1.326 million units. This was the highest level since October 2016 and up 7.3 percent from January 2017. Single-family starts, which account for the largest share of the market, rose 3.7 percent from December while multi-dwelling starts with five or more units surged 19.7 percent. Housing Starts rose in the Northeast, South and West but declined in the Midwest.
Building Permits, a sign of future construction, rose 7.4 percent from December to an annual rate of 1.396 million units. With many buyers facing inventory shortages across much of the country, this strong report regarding new home construction is a welcome sign!
The National Association of REALTORS® reported that January Existing Home Sales declined 3.2 percent from December to an annual rate of 5.38 million units. Sales were down 4.8 percent from a year ago, the largest decline since August 2014. Low inventories of homes for sale were indeed a thorn in the side of would-be buyers with just a 3.4-month supply available at the current sales pace. A 6-month supply is considered healthy.
Retail Sales also disappointed in January, as the Commerce Department reported a 0.3 percent decrease. December’s reading was also revised downward to 0 percent from a 0.4 percent increase. The key highlight was that consumer spending wasn’t strong in recent months, and this could impact GDP expectations.
Consumer inflation edged higher in January, with an important component jumping to a 12-month high! The Consumer Price Index (CPI) rose 0.5 percent in January, just above expectations due to higher gasoline prices, the Labor Department reported. Core CPI, which strips out volatile food and energy prices, rose 0.3 percent from December. This was the largest increase in a year, boosted by rising rents.
Inflation reduces the value of fixed investments like Mortgage Bonds. This means signs of inflation can hurt Mortgage Bonds and impact the home loan rates tied to them, which is a trend we’ve seen through much of this year. Stocks have also reacted negatively to hints that inflation was on the rise because inflation brings higher rates and higher rates hurt corporate borrowing. Stocks even entered correction territory in early February, meaning a 10 percent decline from recent highs.