Short sales and FIRPTA

Here's a hairball - I have a foreign seller doing a short sale, and while the seller won't realize any net at closing, is he still obligated to have the buyer withhold 10% of the forgiven debt as realized income? 

Hmmm...

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Permalink Reply by Bryant Tutas on March 30, 2012 at 10:01am

Yes sir. Unless the buyer is a US citizen purchasing the property for a primary residence. Or a CPA can go ahead and do the filing to the IRS prior to closing.

We have done several fo these and we always looked for a buyer that was purchasing as a primary residence top make things easier.

Permalink Reply by Bryant Tutas on April 1, 2012 at 12:02am

x

Permalink Reply by Debbie Mansell on April 1, 2012 at 1:20am

Having working with 100's of UK sellers, have the sellers Accountant apply to the IRS for a zero withholding certificate.  

If this is produced at closing, no withholding is required and the sale goes through.

Debbie

Permalink Reply by Alex Krumm on April 1, 2012 at 2:18am

Thanks, guys - I had a sneaking suspicion that we'd have to do it, and I'm glad I asked.  Debbie, how long does it take to apply?  Is it as simple as filling out a form and submitting it or would we actually have to wait for a response from the IRS?

Permalink Reply by Debbie Mansell on April 1, 2012 at 2:23am

You have to wait for the certificate to be issued by the IRS showing there is no tax owed.  Timing on this depends on how knowledgable the account is in foreign national purchases/sales.

On average I would say it takes around 6 weeks which given the length of an average short sale it is perfectly doable for someone who knows what they are doing.

Never had a short sale fall apart because we couldn't get the certificate in time.  

Debbie

Permalink Reply by Imran Mohamed on April 1, 2012 at 4:57am

Let seller apply early for FIRTPA Witholding Exemption from the IRS. If you seller's property is in Florida here is a great accounting firm that deals with this issue a lot http://www.hardingtax.com/

 

Also visit the IRS website for more details on FIRTPA

http://www.irs.gov/businesses/small/international/article/0,,id=105...

Permalink Reply by Paul Antonelli on April 2, 2012 at 12:45am

  If the sales price is below $300K the buyer would have to sign an addendum that states they will occupy the property for at least 6 months each year for the next two years, then they won't have to report and with hold any $$.

Permalink Reply by Patrick on April 2, 2012 at 5:43am

I ran into this issue about a year ago. I had to get a release from the IRS stating that the title company didn't have to withhold  funds. The seller was already out of the country (Scotland) as was not cooperative at all. I was able to find a local attorney to handle the IRS documentation and who would wait for the funds from closing. I got the short selling bank to agree to pay the attorney fees ($1,300) and we closed. There were no funds withheld.

Patrick McGuire

Broker Associate

Coldwell Banker

Permalink Reply by Patrick on April 2, 2012 at 5:48am

With regards to occupancy - That is an alternative path but as the property that we were selling was a second vacation home here in Sarasota that they considered making a rental - they refused to sign the occupancy addenda and we had to have the IRS release. If you make them aware of the timing issue they will place a rush on it and give you a response in under 30 days. 

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