....beware of FIRPTA. Foreign Investment in Real Property Tax Act of 1980
In a nutshell, FIRPTA requires the closing agent or buyer to withhold 10% of the amount realized (usually the purchase price) to ensure that the tax due on the sale is given to the IRS. Basically the IRS doesn't want the money leaving the U.S. until they get theirs.
So how does this affect a Short Sale for a foreign investor? To answer this try submitting a preliminary HUD to a Short Sale lender where 10% of the purchase price is being deducted from the lender's proceeds. Usually what happens is that the Short Sale lender comes back and demands that this reduction be removed.
"But Mr Lender, the IRS says we can't do that. We MUST withhold 10%!
"Then.....Mr Short Sale Broker....NO SHORT SALE FOR YOU!!"
So what do you do?
There are exceptions to the FIRPTA withholding. One is, if the sale is $300,000 or less and the purchaser is a homeowner who is going to use the property as their residence for at least 50% of the year then the closer may be able to avoid the FIRPTA withholding all together. This is certainly the easiest way to go.
Secondly, a CPA can file for a Withholding Certificate. The reality is that in a short sale the chance of the seller owing any capital gains tax is slim to none. So they have the option of filing with the IRS in advance of the closing to receive an exception. The IRS can come back stating that a lessor amount or even zero is owed. Once the Withholding Certificate is received the transaction can close with no withholding. The problem with this method is that the filing for the Withholding Certificate can't happen until there is a contract to purchase the property. The IRS could take 3-5 months to make a ruling. You'll need to keep the deal together during this time.
The third option is to get the lender to agree to the 10% withholding with the understanding that once the Withholding Certificate is received the closing agent can release the 10% to the lender. In order for this to happen the filing for the Withholding Certificate would have already needed to be done. The fact that it's been filed allows the closer to withhold the 10% without sending it to the IRS. They can hold it in escrow instead. Then there would need to be an escrow agreement between the seller, buyer and lender stating the funds (minus any tax owed) will be released to the lender.
I bet this is as clear as mud now!!
Are you facing foreclosure in Florida?