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Tax On Real Estate Transfers
The Tax Reform Act of 1984 imposed withholding obligations on conveyances of real estate by foreign persons on or after January 1, 1985 (26 USCA § 1445). See Pub 519, US TAX Guide for Aliens for more information.Tax of 10%. In general, any person (transferee/grantee) who acquires a United States real property interest from a foreign person must withhold a tax of 10% of the amount realized by the transferor foreign person or any lesser amount established by agreement with the I.R.S. The transferee must report and pay any tax withheld by the 10th day after the date of transfer (Form 8288 Rev. 6-2011 and Form 8288-A Rev. 6-2011). However, if an application for a withholding certificate was submitted no later than 30 days prior to the transfer, then the amount withheld need not be reported and paid to the I.R.S. until the 10th day after the I.R.S. determination as to the issuance of a withholding certificate. The contract price is generally equal to the amount realized by the transferor. The date of the transfer is the first date on which consideration is paid or liability is assumed by the transferee. However, earnest money is not taken into consideration as to the payment of consideration.Foreign corporations are subject to a 30% IRS income tax withholding. See 26 USCS Section 1442. A foreign corporation does not include Guam, American Samoa, the Northern Mariana Islands, the Virgin Islands, or Puerto Rico. Certificate of Non-Foreign Status. The transferee is not required to withhold if the transferor provides a certificate of non-foreign status. The transferee must retain the certificate until the end of the fifth taxable year following the taxable year in which a transfer takes place. The certificate must state that the transferor is not a foreign person, must set forth the transferor's name, identifying number and home address (in case of individual) or office address (in case of entity), and must be signed under penalties of perjury. Any certificate by a foreign corporation that it is treated as a domestic corporation must attach a copy of the I.R.S. acknowledgment of such election. Two certificate forms as set forth in the regulations are available for use in transactions involving foreign persons. In order to enhance customer relations, it is advised that these certificates be used in all transactions unless otherwise instructed by the parties. The buyer should retain one original executed certificate and the title insurance agency should retain one executed certificate.Sale is Less Than $300,000. The transferee has no obligation to withhold if the transferee is an individual acquiring the property for use as a residence and the amount realized is $300,000 or less.
Initial Payment Insufficient. The duty to withhold and the amount required to be withheld are not affected by the amount of cash paid by the transferee. If the transferee cannot withhold the full amount required because the first payment does not involve sufficient cash or other liquid assets then the transferee must secure a withholding certificate from the Internal Revenue Service. As to dispositions taking place after December 31, 1984, the transferee is required to satisfy its withholding obligation from the initial installment payment unless it secures a withholding certificate from the Internal Revenue ServiceGift of Property. Withholding is not required if the real property is transferred as a gift.Penalties. Each transferee required to deduct and withhold the tax may be assessed such amounts together with penalties and interest for failure to deduct and withhold. The transferee failing to withhold may also be subject to criminal penalties under Section 7202 of the Internal Revenue Code. Corporate officers may also be subject to civil penalties.False Certificate. A transferee cannot rely upon the certificate if, prior to the time of the transfer, the transferee has actual knowledge that it is false or receives notice from the transferor's agent or transferee's agent that it is false. If the transferee receives notice that the certificate is false prior to payment of all consideration it must withhold 10% of the amount realized.Foreclosure or Repossession. A party acquiring the property by foreclosure or repossession under a mortgage or deed of trust is required to withhold taxes at the time of repossession. If the transferee complies with the notice requirements of the regulations and provides the notice to the I.R.S., then the amount required to be withheld should be the lesser of 10% of the amount realized by the mortgagor on the transfer or the excess of the amount realized by the mortgagor over the debt secured by the property at the time of foreclosure. The special procedural rules do not apply to a deed in lieu of foreclosure. A withholding certificate must be sought in connection with such Deed. Apparently, however, the lender could secure at the time of the loan certificate that the mortgagor (who was later a transferor by foreclosure or deed) was not a foreign person if the lender did not later discover that this was untrue.Reduced Withholding. Withholding may be reduced or eliminated by a withholding certificate issued by the Internal Revenue Service. Excuse from withholding may occur where the transferor is exempt from taxes, where no taxes are owed or pursuant to an agreement for payment of taxes. Otherwise, the I.R.S. may authorize reduced withholding. The Internal Revenue Service will act upon an application of either the transferor or the transferee for such withholding certificate not later than 90 days after receipt.Notice of False Certificate. The transferor's agent or transferee's agent (e.g. broker or attorney) must notify the transferee of the agent's knowledge that a certificate is false. Such notice must be in writing as soon as possible after learning of the false certification and not later than the date of transfer. The agent must send a copy of such notice to the Director of the Internal Revenue Service. The person is not treated as a transferor's agent or transferee's agent solely because the person receives and disburses the consideration, records documents in connection with the transaction, or types, copies or performs other clerical tasks. Depending upon the facts, it could be argued that escrow agents are agents of a transferor or transferee.Notice to Transferee. If the title insurance agency is aware that a selling entity is or may be a "foreign person" because recorded documents in the chain of title reflect that the seller is a foreign entity such as a foreign corporation, it is suggested that the title agency notify the buyer in the form available through the references section at the beginning of this chapter. Although there should be no legal obligation to make such disclosure, this notice will certainly enhance customer relations. However, the title insurance agency should be certain of the facts before using such notice.Written Escrow Instructions are Furnished. If written escrow instructions are furnished, consider adding a disclaimer that the title insurance agency has no obligation to verify whether the transferor is a foreign person and that the transferee should seek legal advice on this issue unless the matter is otherwise handled, as by payment to the I.R.S.Funds in Escrow. If a title insurance agency holds funds in escrow pursuant to the consent of all parties in connection with these matters, it should require a written agreement to address issues such as interest on the funds, the necessity of written instructions before disbursement, the manner of disbursement (e.g. to I.R.S. or party to transaction), that the title insurance agency is not giving legal advice, that the buyer should seek independent legal advice, and that retention of funds in escrow may not be in compliance with the requirements of law for withholding and payment to the I.R.S.