Foreign Investment in Real Property Tax Act 1980 – Buyer AND Seller Beware - Part 3

Certifying Acceptance Agency

A certifying acceptance agent is a person that is authorized under an agreement with the IRS to submit a Form W-7 to the IRS on behalf of an ITIN applicant without furnishing supporting documentary evidence. Instead, when a certifying acceptance agent submits a Form W-7 to the IRS, it certifies to the IRS that it has reviewed the appropriate documentation evidencing the ITIN applicant's identity and alien status, and that it is maintaining a record of such documentation. In addition, the certifying acceptance agent must certify that, to the best of its knowledge and belief, the documentation is authentic, complete, and accurate. As part of the certification, the certifying acceptance agent must describe the documentation upon which it is relying. The certification is not binding on the IRS, and, in appropriate cases, the IRS may request to see appropriate documentation before issuing an ITIN.

Real Estate Closing Issues

Foreign owners of U.S. real property interests often are unaware until immediately before closing of the FIRPTA withholding requirement or the requirement to provide a TIN. They should be informed as a matter of routine at the time of contract of these issues at which point there is sufficient time in which to act to mitigate their effects. The buyer's attorney should consider incorporating appropriate language in the contract well before closing occurs in order to provide the seller with adequate notice.

While the regulations are not clear, It appears the IRS Form W8-BEN should be used to provide their TIN to the other party. Both buyer and seller should be required to provide this information at the time of contract.

Exceptions to the Requirement of Withholding

No withholding is required if the buyer can establish either that:

  1. the seller is not a 'foreign person',
  2. the interest transferred is not a U.S. Real Property Interest (USRPI)
  3. the seller is not subject to taxation on the transaction (for a variety or reasons),
  4. the seller qualifies for reduced withholding (e.g. under certain tax treaties) or has qualified for a withholding certificate.

Non-Foreign Person

There is an exception to withholding if the seller furnishes to the buyer an affidavit stating, under penalty of perjury, that the seller is not a foreign person and containing the seller's TIN. Form W-9 is used for this purpose. A buyer (and agent thereof) may rely on this statement and will be relieved of the withholding obligation unless he/she has notice or knowledge that the non-foreign affidavit is false.

Exception to the General Rule

Probably the most important exception is that a person who acquires property for use by him as a residence is not required to withhold tax if the total purchase price for the property does not exceed $300,000. In order to claim this exemption, the buyer must have definite (and carried out) plans to reside at the residence for at least 50% of the number of days the property is in use during each of the first two 12-month periods following the date of the sale.

Withholding Certificates

The amount required to be withheld in a transaction cannot exceed the amount that the IRS determines to be the seller's maximum tax liability. Either the buyer or the seller may request a determination of the seller's maximum tax liability from the IRS. The seller may seek an early refund of any amount withheld in excess of the seller's maximum tax liability. The buyer may also be motivated by a concern to determine its withholding requirement or to shorten period during which any withholding tax is held in escrow.

The amount required to be withheld can be adjusted pursuant to a withholding certificate issued by the IRS. A withholding certificate may be issued as a result of:

  1. A determination by the IRS that reduced withholding is appropriate because either:
    1. The amount required to be withheld would be more than the seller's maximum tax liability, or

    2. Withholding of the reduced amount would not jeopardize collection of tax

  2. The exemption from U.S. tax of all gain realized by the seller, or

  3. An agreement for the payment of tax providing security for the tax liability, entered into by the buyer or the seller.

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