FRTPA AND 1099-S 9/5/18 AGENDA. 1445(a) GENERAL RULE

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1 FRTPA AND 1099-S MICHAEL D. MATEJKA, PARTNER NEBRASKA LAND TITLE ASSOCIATION 2018 ANNUAL MEETING AGENDA 1. Withholding on Dispositions of U.S. Real Property Interests by Foreign Persons a. Duty to withhold b. Situations in which withholding is not required c. Liability of agents 2. Reporting Proceeds from the Sale or Exchange of Real Estate a. Reportable real estate b. Exceptions c. Who must file 1445(a) GENERAL RULE qexcept as otherwise provided in this section, in the case of any disposition of a United States real property interest (as defined in section 897(c)) by a foreign person, the transferee shall be required to deduct and withhold a tax equal to 15 percent of the amount realized on the disposition. 1

2 UNITED STATES REAL PROPERTY INTEREST qan interest in real property (including an interest in a mine, well, or other natural deposit) located in the United States or Virgin Islands. Section 897(c)(1) (A)(1). qan interest (other than an interest solely as a creditor) in any domestic corporation unless the taxpayer establishes (at such time and manner as the Secretary by regulations prescribes) that such corporation was at no time a United States real property holding corporation. Section 897(c)(1)(A)(ii) FOREIGN PERSON 1445(f)(3) qthe term foreign person means any person other than a United States person, and except as otherwise provided by the Secretary, an entity with respect to which section 897 does not apply by reason of subsection (l) thereof. IRS INSTRUCTIONS FOR FORM 8288 qforeign Person A nonresident alien individual, A foreign corporation that does not have a valid election under section 987(i) to be treated as a domestic corporation, A foreign partnership, trust, or estate qa resident alien is not a foreign person 2

3 RESIDENT ALIEN STATUS qhttps:// -taxpayers/determining-alien-tax-status qgreen card test qsubstantial Presence Test (SPT) GREEN CARD TEST qyou generally have this status if the U.S. Citizenship and Immigration Services (USCIS) issued you an alien registration card, Form I-551, also known as a "green card." SUBSTANTIAL PRESENCE TEST qyou will be considered a United States resident for tax purposes if you meet the substantial presence test for the calendar year. To meet this test, you must be physically present in the United States (U.S.) on at least: 31 days during the current year, and 183 days during the 3-year period that includes the current year and the 2 years immediately before that, counting: All the days you were present in the current year, and 1/3 of the days you were present in the first year before the current year, and 1/6 of the days you were present in the second year before the current year. 3

4 EXEMPTION-RESIDENCE WHERE AMOUNT REALIZED DOES NOT EXCEED $300,000 qthe property is acquired by the transferee for use by him as a residence and the amount realized for the property does not exceed $300,000. TRANSFEREE MUST USE AS RESIDENCE FOR 50% OF EACH OF THE NEXT TWO YEARS. REG (d)(1) q No withholding is required under section 1445(a) if one or more individual transferees acquire a U.S. real property interest for use as a residence and the amount realized on the transaction is $300,000 or less. For purposes of this section, a U.S. real property interest is acquired for use as a residence if on the date of the transfer the transferee (or transferees) has definite plans to reside at the property for at least 50 percent of the number of days that the property is used by any person during each of the first two 12-month periods following the date of the transfer. The number of days that the property will be vacant is not taken into account in determining the number of days such property is used by any person. A transferee shall be considered to reside at a property on any day on which a member of the transferee's family, as defined in section 267(c)(4), resides at the property. No form or other document need be filed with the Internal Revenue Service to establish a transferee's entitlement to rely upon the exception provided by this paragraph (d)(1). A transferee who fails to withhold in reliance upon this exception, but who does not in fact reside at the property for the minimum number of days set forth above, shall be liable for the failure to withhold (if the transferor was a foreign person and did not pay the full U.S. tax due on any gain recognized upon the transfer). However, if the transferee establishes that the failure to reside the minimum number of days was caused by a change in circumstances that could not reasonably have been anticipated at the time of the transfer, then the transferee shall not be liable for the failure to withhold. q The exception provided by paragraph (d)(1) does not apply in any case where the transferee is other than an individual even if the property is acquired for or on behalf of an individual who will use the property as a residence. However, this exception applies regardless of the organizational structure of the transferor (i.e., regardless of whether the transferor is an individual, partnership, trust, corporation, etc.). EXEMPTION TRANSFEROR FURNISHES NONFOREIGN AFFIDAVIT. SECTION 1445(b)(2) qwithholding is not required if the transferor furnishes to the transferee an affidavit by the transferor stating under penalty of perjury, the transferors United States taxpayer identification number and that the transferor is not a foreign person. 4

5 KNOWLEDGE OF FALSITY- REG (b)(4)(iii) qa transferee is not entitled to rely upon a transferor s certification if prior to or at the time of the transfer the transferee either: Has actual knowledge that the transferor s certification is false; or Receives a notice that the certification is false from a transferor s agent or transferees agent pursuant to Reg BELATED NOTICE OF FALSE CERTIFICATION qif after the date of the transfer a transferee receives a notice that a certification is false, then that transferee is entitled to rely upon the certification only with respect to consideration that was paid prior to receipt for the notice. Reg (b)(4)(iv) DISREGARDED ENTITIES qa disregarded entity may not certify that it is the transferor of a U.S. real property interest, as the disregarded entity is not the transferor for U.S. tax purposes. Rather, the owner of the disregarded entity is treated as the transferor of property and must provide a certificate of non-foreign status to avoid withholding. Reg (b)(2)(iii). 5

6 TRANSFEREE MUST RETAIN CERTIFICATION qthe transferee must retain the certification until the end of the fifth taxable year following the taxable year in which the transfer takes place. Reg (b)(3). WITHHOLDING CERTIFICATE qwithholding under section 1445(a) may be reduced or eliminated pursuant to a withholding certificate issued by the IRS. Reg qirs form 8288-B is used to apply for a withholding certificate. qthe instructions for form 8288-B state that the IRS will normally act on an application within 90 days of receipt of all information necessary to make a proper determination. WITHHOLDING qgenerally you must withhold 15% of the purchase price. If the property is purchased by the transferee for $1,000,000 or less for use as the transferee s residence, the withholding is 10%. qthe amount withheld is paid and reported with IRS form 8288 and 8288-A. 6

7 LIABILITY OF AGENTS qa transferee s or transferor s agent must provide notice to the transferee if the agent knows the non-foreign certification is false. The agent must file a copy of the notice with the IRS. Settlement officers are not treated as agents. Reg S REPORTABLE REAL ESTATE qa sale or exchange of any present or future ownership interest in any real estate EXCEPTION FOR SALE OR EXCHANGE OF RESIDENCE qthere is an exception for the sale or exchange of the seller s principal residence if all of the gain of such sale is excludable from gross income under Section 121 of the Internal Revenue Code. qmust receive a certification signed by the sellers under oath. 7

8 EXCEPTION FOR SALE OR EXCHANGE OF RESIDENCE qa sample certification format can be found in Rev. Proc , I.R.B. 354, available at IRS.gov/irb/ IRB/ar09.html. qthe certification must be kept for 4 years after the year of sale. EXCEPTION FOR CORPORATION qany transaction in which the transferor is a corporation, a governmental unit, or an exempt volume transferor. qan exempt volume transferor expects to sell or has sold at least 25 separate items of reportable real estate to at least 25 separate transferees in a year in the ordinary course of a trade or business. EXCEPTION FOR ANY TRANSACTION THAT IS NOT A SALE OR EXCHANGE qa bequest, gift, financing or refinancing 8

9 EXCEPTION FOR FULL OR PARTIAL SATISFACTION OF DEBT qforeclosure, transfer in lieu of foreclosure, or abandonment EXCEPTION FOR DE MINIMUS TRANSFER qless than $600 for the transaction as a whole RESPONSIBILTY FOR FILING qgenerally, the person responsible for closing the transaction is required to file Form 1099-S. 9

10 THANK YOU! MICHAEL D. MATEJKA, PARTNER WOODS & AITKEN LLP REGENCY CIRCLE, SUITE 525 OMAHA, NE PHONE: (402)