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Foreign Seller in California; Withholding Tax required?

Posted by Kimberley Kelly on February 12, 2014 at 5:02am in Short Sale Discussions

My Short Sale Seller is a foreigner.  California requires Fed/State Tax Withholding on any sales by a foreigner.  Short Sales Net zero..does anyone know if there is an exemption for Short Sales?

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Tags: california, foreign, in, sale, seller, short
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  • Jeff Payne February 12, 2014 at 11:06am

    The Foreign Investment in Real Property Tax Act of 1980 (FIRPTA), enacted as Subtitle C of Title XI (the "Revenue Adjustments Act of 1980") of the Omnibus Reconciliation Act of 1980, Pub. L. No. 96-499, 94 Stat. 2599, 2682 (Dec. 5, 1980), is a United States tax law that imposes income tax on foreign persons disposing of United States real property interests. Tax is imposed at regular tax rates for the type of taxpayer on the amount of gain considered recognized. Purchasers of real property interests are required to withhold tax on payment for the property. Withholding may be reduced from the standard 10% to an amount that will cover the tax liability, upon application in advance of sale to the Internal Revenue Service. FIRPTA overrides most nonrecognition provisions as well as those remaining tax treaties that provide exemption from tax for such gains.

    • Wayne Brooks > Jeff Payne February 12, 2014 at 11:23am

      Right, there's a procedure for avoiding the withholding.  I don't know it exactly, but it has to be done in advance, and I hear maybe 4 weeks time.

  • Jeff Payne February 12, 2014 at 7:23am

    NET zero?  not trying to be a smart alec but 10% times zero equals zero?

    • Kimberley Kelly > Jeff Payne February 12, 2014 at 9:26am

      Exactly!!  But..Escrow is still insisting they MUST withhold 10% of the Sales price..makes NO sense to me and Short Sale Lender isn't going for it, but hard to fight the IRS!!

      • Jeff Payne > Kimberley Kelly February 12, 2014 at 11:01am

        Find a new escrow company.  I will check with my escrow company to verify if they are correct

        • Jeff Payne > Jeff Payne February 12, 2014 at 11:03am

          Foreign persons are generally exempt from U.S. tax on capital gains.[5]

          Under FIRPTA, however, foreign persons are subject to tax on gains from disposition of U.S. real property interests (USRPIs).

          • An interest in property is any direct equity interest in the property, such as a fee simple ownership, but does not include interests solely as a creditor. Thus, co-owners of property each hold an interest in the property, but a bank holding a mortgage does not.[6]
          • Real property is land, buildings, and land improvements.[7] Generally, whether property is or is not real property is determined under U.S. tax law concepts, not state law. Thus, gas pumps and awnings at gas stations are not real property under U.S. Federal tax law, even though they may be realty under state law. For FIRPTA purposes, real property also includes unsevered natural products of the land (e.g., oil and gas in place in the ground, uncut timber, unharvested crops) and personal property associated with the use of real property.[8]
          • A United States real property interest (USRPI) includes shares of a U.S. real property holding corporation (USRPHC). A USRPHC includes any U.S. corporation if more than 50% of such corporation's assets were USRPIs at any testing date.[9] Disposition of an interest in a USRPHC is subject to the FIRPTA tax and withholding but is not subject to state income tax. This may be compared with the disposition of a USRPI owned directly, which is subject to the lower federal capital gains rate but is also subject to the state income tax
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