When The Short Sale Involves A Foreign Seller......

By
Real Estate Broker/Owner with Tutas Towne Realty, Inc and Garden Views Realty, LLC BK607690

Davenport Florida Short sale....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!!

My suggestion is to seek competent tax and legal advice when dealing with short sales for foreign property owners. And be aware of FIRPTA. Don't let this come up at the last minute and bite you in the rear. OK?



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Comments (32)

Michelle Francis
Tim Francis Realty LLC - Atlanta, GA
Realtor, Buckhead Atlanta Homes for Sale & Lease

BB, 

Good to know.  I work with a lot of foreign buyers, so far no short sales!  What I do know is that I don't know enough about them and should stick to executive leasing and refer them out. 

All the best, Michelle

May 15, 2011 01:51 PM
Jack O'Neal
HomeSmart Elite Group - Gilbert, AZ

Interesting, all my foreign clients have been cash buyers

May 15, 2011 02:11 PM
John Elwell
CENTURY 21 Bill Nye Realty, Inc. - Zephyrhills, FL
You Deserve a Full-Time Agent, Not Reduced Results

Our FARA 9 contracts have a specific addendum that addresses FIRPTA quite clearly. Even the title companies know about it and can explain how it can affect some buyers but not others. However, I was amazed at how few agents I know even know about the law and its requirements which are spelled out so graphically in the addendum. Even after they were told, they are resisting putting it in their contracts when they have a foreign buyer. They just will not listen to the facts. Oh well they know it all. So I let them be. Then when the you-know-what hits the fan, they can try to talk their ways out of a sticky situation.

May 15, 2011 03:27 PM
Laura Higginbotham
Arizona Real Estate Options - Mesa, AZ
Broker/Real Estate Consultant, Mesa, Arizona Home

I haven't come across this yet but know it is only a matter of time. I really apprecaite you posting this information!

May 15, 2011 03:51 PM
Patrick White
Home Driven Realty, Inc - Baldwin, NY
Driven to bring New Yorkers home

Good Evening Bryant

Thanks for the post. Have a great day

May 15, 2011 04:10 PM
Eric Michael
Remerica Integrity, Realtors®, Northville, MI - Livonia, MI
Metro Detroit Real Estate Professional 734.564.1519

BB, I haven't had a "foreign investor" actually close on a deal yet. I did have one, however, do everything he could to use me and then have another agent sign the contract.

May 15, 2011 04:27 PM
Praful Thakkar
LAER Realty Partners - Andover, MA
Andover, MA: Andover Luxury Homes For Sale

Bryant, very informative and educational post - in fact, I plan to work with 'foreign investor' - mostly from India and will need to learn more. Have bookmarked your post for future reference.

May 15, 2011 04:30 PM
Evelyn Kennedy
Alain Pinel Realtors - Alameda, CA
Alameda, Real Estate, Alameda, CA

Bryant:

I was talking with an escrow officer the other day about this problem.  The seller needs sound tax advice.

May 15, 2011 05:25 PM
Ronald DiLalla
Century 21 Discovery DRE 01813824 - Anaheim, CA
No. Orange Cty Real Estate

Hi Bryant,  I haven't had a short sale with a  Firpta condition so thanks for sharing as I will keep this info in my short sales file.

May 15, 2011 06:14 PM
Tni LeBlanc, Realtor®, J.D.
Mint Properties, Lic. #01871795 - Santa Maria, CA
Tenacious Tni (805) 878-9879

Yuck what a mess.  I haven;t had to deal with this situation but what a nightmare.  Who wants to wait 3 -5 months for an IRS ruling.  Even more speed bumps on the short sale train. 

Thanks for the info Bryant.

May 15, 2011 07:41 PM
Christine Donovan
Donovan Blatt Realty - Costa Mesa, CA
Broker/Attorney 714-319-9751 DRE01267479 - Costa M

BB - Something important to think about for those of us helping on either side of a short sale.

May 15, 2011 08:04 PM
Cheryl Ritchie
RE/MAX Leading Edge www.GoldenResults.com - Huntingtown, MD
Southern Maryland 301-980-7566
This is a very good post and reblog, too. Thank you for the information!
May 15, 2011 11:00 PM
Fernando Herboso - Broker for Maxus Realty Group
Maxus Realty Group - Broker 301-246-0001 - Gaithersburg, MD
301-246-0001 Serving Maryland, DC and Northern VA

Here in Maryland we have also a law that affects any property owner that lives out of state. . .but there is an exception when there evidence that there is no profit out of the short sale. . caveat: plan ahead.

This gets more complicated when the IRS gets involved.

May 16, 2011 12:34 AM
Rob Arnold
Sand Dollar Realty Group, Inc. - Altamonte Springs, FL
Metro Orlando Full Service - Investor Friendly & F

Thanks for posting this. We had a short sale with a foreign seller blow up about 2 years ago because of this very issue.  It never was able to close.  At least now I am aware that there are possible solutions to this problem short of getting the lender to allow the 10%.

May 16, 2011 01:44 AM
Sharon Alters
Coldwell Banker Vanguard Realty - 904-673-2308 - Fleming Island, FL
Realtor - Homes for Sale Fleming Island FL

Bryant, we don't really deal with foreign investors much here in Jacksonville, but I remember FIRPTA well from our Orlando days. So what chapter is this in your short sale book?

Sharon

May 16, 2011 02:23 AM
Adam Mallory
eBroker Real Estate 619-566-ADAM - San Diego, CA
Broker, ABR, e-Pro

Excellent post Bryant!  I hadn't heard of this before.  Of course, I haven't had a Short Sale listing with a foreign Seller before.  Good to know for the future!

May 16, 2011 08:34 AM
Bryant Tutas
Tutas Towne Realty, Inc and Garden Views Realty, LLC - Winter Garden, FL
Selling Florida one home at a time

Thanks for stopping by!!

Being in the Disney area, as I am, we have tons of foreign investors. Just another hurdle to jump over.

May 16, 2011 10:16 AM
Elizabeth Weintraub Sacramento Realtor Top 1%
RE/MAX Gold - Sacramento, CA
Put 40 years of experience to work for you

There is also the other side of the coin. My associate wrote an offer for a foreign buyer on a short sale. He wired $350,000 to escrow. Halfway through the deal, he contacted his agent to say his wife won't sign off the quitclaim so he needs to give her $200,000 or something to get her to do it. He put in a request to receive $200,000 of his wire back. The title company tried to refund the money when it suddenly discovered the entire wire transfer was a fraud. There was no money in escrow. How do they do that? How do they wire money in the first place that doesn't exist?

May 16, 2011 10:29 AM
Wendy Rulnick
Rulnick Realty, Inc. - Destin, FL
"It's Wendy... It's Sold!"
Bryant - I have not had a foreign short sale seller yet, but I know who I'll call when I do. Well researched, my friend.
May 16, 2011 12:08 PM
Nathan Tutas
Tutas Towne Realty, Inc. - Davenport, FL
Your Central Florida Real Estate Expert

Very timely post dad. I just happen to be selling a short sale for a foreign investor right now. I thought about writing about this the other day but you beat me to the punch. Mind reader...

May 17, 2011 03:51 PM

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