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Category: Taxes for Non-Residents


Foreign Notion – Can a Buyer be Liable for the Seller’s Income Tax?

May 14th, 2012 — 1:19pm

Contracts for the purchase or sale of real property in New York invariably include a provision that requires the seller to deliver a so-called “FIRPTA” affidavit to the purchaser at closing.  Often times, the parties are not familiar with the requirements surrounding the FIRPTA affidavit.  However, in today’s market, with the ever growing presence of foreign real estate investors and developers, it is imperative that real estate buyers and sellers understand the implications of the FIRPTA requirements. Continue reading »

FIRPTA stands for the “Foreign Investment in Real Property Tax Act” of 1980 (the “Act”).  Pursuant to US tax law, all persons, whether foreign or domestic, must pay income tax on sales of U.S. real property interests.  Domestic persons are subject to this tax as part of their regular income tax, but foreigners are not.  As such, the Act was passed to address how foreign sellers pay this income tax.  In order to ensure that foreign sellers pay the tax, the Act requires purchasers of real property to withhold 10% of the full sales price.   If the seller is a foreign corporation, the percentage increases to 35%.

Under the Act, a foreign person is a nonresident alien individual, foreign corporation that has not made an election under the tax law to be treated a domestic corporation, foreign partnership, foreign trust or a foreign estate.  It does not include a resident alien individual.

There are a few exemptions under which a seller may be exempt from FIRPTA, including:

1. If the purchase will  be used as a residence for a price $300,000 or less;

2. If the purchaser receives a statement from the seller that the seller is a not a foreign person;

3. If the purchase is of an interest in a non-publicly traded domestic corporation where the corporation provides the required affidavit; or

4. If the purchase is of shares of a publicly traded corporation.

The most common method of ensuring the purchaser that the seller is not a foreign person, and relieving the purchaser of the FIRPTA withholding, is by the seller’s delivery to the purchaser of an affidavit commonly called the “FIRPTA affidavit”.

If it is determined before closing that the seller is a foreign person, the buyer must report and pay over any tax withheld using IRS form 8288 and 8288-A.  In most cases, this must be done by the 20th day of the transfer.  When a title agency is involved in the transaction, the agency can verify the seller’s status and oversee the necessary paperwork.   If the transferor is a foreign person and the buyer fails to withhold the tax, that buyer may be held liable for the tax.  This potential exposure mandates particular attention to this often overlooked aspect of the real estate closing.

It goes without saying that a “foreign person” buying United States real estate should be aware that they will be subject to FIRPTA withholding when they eventually sell the property.

By: Nahum M. Palefski, Esq. and Jerome J. Strelov, Esq.

Comment » | FIRPTA, News, Special Taxes For Non-Residents, Taxes for Non-Residents

Out of State, Not Out of Mind

February 1st, 2012 — 10:25am

By now almost everyone is familiar with the transfer taxes imposed by the City and the State on sales of real property or co-operative apartments.  However, not everyone knows that non-residents must also pay a tax on their gain at the time of closing.  This can lead to a delay in the closing by unaware sellers. Continue reading »

The procedure by which transfer taxes are paid and transfer documents are recorded is the execution and subsequent filing of the New York City Real Property Transfer Tax Return and the New York State Combined Real Estate Transfer Tax Return (“TP-584”).

In 2003, the New York State Budget Bill added Section 663 to the Tax Law requiring nonresident sellers to pay estimated personal income tax on the gain resulting from the sale of real property in New York State.  The tax (currently 8.82% of the gain) is in addition to the transfer taxes to the City and State and is due at the time of closing by selling individuals, trusts and estates.

The TP-584 (State transfer tax form) requiresthese  sellers to certify that they are residents of the New York State at the time of the Closing.

Those who cannot certify they are residents must complete forms (the IT-2663, for condominiums, homes and other real property or the  IT-2664, for cooperatives) which detail the gain (or loss) resulting from the sale of the subject property and compute the estimated personal income tax due.  The tax must be paid at the closing.

There are three exemptions to the requirement to pay estimated personal income tax to NYS under Tax law section 663 as follows:

1)       If the “real property or cooperative unit being sold or transferred qualifies in total as the transferor’s/seller’s principal residence.”  Meaning, a nonresident seller may be exempt from the payment of estimated tax if the property has been used as the taxpayer’s “principal residence.”  The term “principal residence” has been understood to mean that the seller must have owned the property and lived in it as his or her main home for at least two years during the five year period ending on the date of the transfer;

2)       If the seller is a mortgagor conveying mortgaged property to a mortgagee in foreclosure, or in lieu of foreclosure with no additional consideration; or

3)      If either the seller or buyer is an agency or authority of the United States of America, the State of New York, the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation, the Government National Mortgage Association, or a private mortgage insurance company.

The IT-2663 and IT-2664 forms are somewhat complicated as they contain line items for improvements, closing costs and depreciation and are typically completed by the seller’s accountant.  As such, the appropriate IT form should be forwarded to the seller’s accountant well before closing to avoid a delay of the closing.

By Jerome J. Strelov and Nahum M. Palefski

 

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