What is Eminent Domain?
Eminent Domain is the power of the government to condemn (take) private property for a public purpose without the property owner’s consent.  The Florida Constitution requires that no private property shall be taken except for a public purpose and with full compensation paid to each owner.  The Florida Constitution’s guarantee of “full compensation” is intended to ensure that the owner receives full, fair, and complete compensation.

What is the Public Purpose Requirement?
The Florida Constitution prohibits use of the power of eminent domain except for a “public purpose.”[i] In determining whether a particular use of eminent domain is for a public purpose, Florida courts have historically held that the public interest must dominate the private gain.[ii]  Additionally, a condemning authority must only take the amount of land reasonably necessary to achieve this public purpose. The requirement of public purpose and public use is essentially a limitation on the exercise of the power of eminent domain.  When faced with a government taking, it is important to seek representation right away to evaluate whether the condemning authority has properly complied with Florida law.

How Much will it Cost in Attorney’s Fees?
As part of the Florida Constitution’s guarantee of full compensation, a condemning authority is required to pay the property owner’s attorneys’ fees and reasonable costs of the condemnation proceedings.  These costs include reasonable appraisal fees and other costs associated with formulating the property owner’s claim.  The amount of the attorneys’ fees to be paid in an eminent domain matter is calculated based upon a statutory formula in the Florida Statutes.  Attorney’s fees are paid separately from the property owner’s compensation and do not reduce the property owner’s overall recovery.

When Should I Seek Legal Representation?
When facing a taking, it is important that the property owner seek legal counsel as soon as possible.  A government taking by eminent domain can have significant impacts on property rights and values.  Understanding how the process works can assist in ensuring that the property owner is adequately compensated and that property rights are preserved.  Our law firm is committed to ensuring that your property is protected, and you are compensated to the fullest extent of the law. If you have received a condemnation notice, contact one of our Orlando eminent domain attorneys right away.

[i] Article X, § 6, Fla. Const.

[ii] Demeter Land Co. v. Florida Public Service Co., 99 Fla. 954, 128 So. 402, 406 (1930)

In Florida, there are a variety of deeds that serve to convey title to a property. The main difference between these types of deeds is the extent to which the seller promises or covenants certain facts with respect to the status of the property. Therefore, the type of deed which is executed impacts the level of protection the buyer receives. It is important to understand these differences to ensure the appropriate deed is executed based on each specific situation. From the most covenants to the least, the following is a brief discussion on general warranty deeds, special warranty deeds, and quitclaim deeds.

 

GENERAL WARRANTY DEED

This type of deed provides the buyer the highest level of protection because it contains covenants that certain facts are true. The following are the covenants of title contained within a general warranty deed:

Notably, these covenants are given by the seller on behalf of all the prior owners of the property.

 

SPECIAL WARRANTY DEED

This deed provides less protection to the buyer than a general warranty deed. Although a special warranty deed contains the same covenants as a general warranty deed the covenants only apply to the period of time in which the seller owned the property.

 

QUITCLAIM DEED

This deed conveys the property without the grantor providing any covenants, including whether the grantor has an ownership interest in the property at all. As this deed provides the least amount of protection for the grantee, it is typically used to transfer ownership between parties that have a prior relationship. Quitclaim deeds are commonly used to convey property to family members, to a revocable living trust, to a former spouse as part of a divorce settlement, and to a business entity.  They are also frequently used to cure title defects, such as to correct a scrivener’s error in the legal description of a property.

 

 

ShuffieldLowman’s real estate and banking & finance legal teams are here to help answer your questions regarding deeds and which one works best for your particular needs. For more information, visit our contact page HERE.

On June 27, 2020, Florida Governor Ron DeSantis signed House Bill 469 into effect, and it became law on July 1, 2020. The Bill amends Florida Statute §689.01 by removing the requirement that two witnesses must be present for a commercial or residential property lease to be valid. Prior to the amendment of the Statute, each of the parties were required to have two witnesses present when signing a lease for a term of more than one year. The House Bill provides that subscribing witnesses are no longer required to validate instruments conveying or pertaining to a lease of real property.

This requirement was originally in place to prevent fraud or forgery, as witnesses could be asked to verify the legitimacy of leases after the fact in the case of a challenge. However, as Florida and many other jurisdictions trend more heavily in favor of electronic transactions, it has long been a question of whether witnesses are truly necessary. The burden of the witness requirement has only grown through the use of electronic transactions, often adding unnecessary delay to make sure witnesses are available at the same time as the landlord and the tenant.

While this change in the law is small, it is widely welcomed. The removal of the witness requirement improves the speed and efficiency of transactions by making electronic lease signatures much more easily obtainable. This not only has the potential to save time in the execution of leases by allowing a lease to be signed by just the two parties, it also removes one potential pitfall to invalidating a lease.

If you have questions about House Bill 469 or the execution and other requirements for leases in Florida, please contact our real estate law team.

When it comes to residential property sales, a homebuilder’s obligations regarding the nature and extent of information about a home that must be disclosed varies widely by state. While every state requires some form of property disclosure, homebuilders seeking to finalize a deal and buyers eager to gain information about a prospective home or neighborhood likely want to pay close attention to the laws of their state regarding what information must be specifically disclosed.

Under Florida law, whether a residential property seller has a duty to disclose facts which may affect a buyer’s decision to purchase a home is governed by the Florida Supreme Court case, Johnson v. Davis. 480 So. 2d 625 (Fla. 1985). In Johnson, a residential buyer claimed that serious roof defects, known to the seller, were misrepresented or not disclosed prior to sale. Largely abandoning the common law doctrine caveat emptor, or “buyer beware,” the Court reasoned that a seller should be held liable for failing to disclose a property’s material defects of which he or she has knowledge. The Johnson case became the law in Florida, applicable to all residential property transactions, establishing that where a seller knows information about a home, which is neither readily observable nor known to the buyer, but materially affects the property’s value, such information must be disclosed. Subject to a few exceptions, this duty to disclose material facts has been extended to various forms of physical defects and off-site conditions. Thus, it is important that homebuilders in the state of Florida are aware that they have a duty to disclose facts about home conditions of which they have knowledge and which materially affect a property’s value or desirability, where such facts are either accessible only to the homebuilder or are known by the homebuilder to be outside the reach of the buyer’s diligent attention and observation.

Notably, a homebuilder’s duty to disclose material facts affecting a residential property is not all-encompassing. By enactment of state statute, Florida has exempted certain property conditions which, though likely to affect the value of a property, are nonetheless excluded from mandatory disclosure. Specifically, a Florida seller has no duty to disclose that a residential property was the site of a homicide, suicide, or death or that the prior occupant of the property was infected with human immunodeficiency virus (HIV) or diagnosed with acquired immune deficiency syndrome (AIDS) (see Fla. Stat. §689.25(1)(2)). While these “psychological conditions,” unrelated to the physical condition of the home, have been specifically exempted, disclosure of other forms of information, such as the presence of registered sexual offenders in a home’s vicinity, has not yet been definitively addressed. Though Florida Courts have not offered any express guidance, a homebuilder concerned about whether or not it has a duty to disclose such information may potentially be protected from doing so under Florida case law dealing with disclosure of information contained within the public record.

In Nelson v. Wiggs, the Third District Court of Appeal held that enactment of housing code regulations, and availability of those regulations in the public record, was sufficient to place information regarding a property’s possible flood risk within the diligent attention of any buyer. 699 So. 2d 258 (Fla. 3d DCA 1997). Finding that such information was readily observable and within a buyer’s diligent attention, the court consequently determined the residential property’s seller had no duty to disclose. Like the county regulations in Nelson, information regarding the physical residences of registered sexual offenders and predators in the state is made publicly available by the Florida Department of Law Enforcement (FDLE) (see Fla. Stat. §§944.606, 775.21). Florida Statutes detailing procedures for dissemination of such registry information note that the systems serve to ensure public access; moreover, the expressed legislative intent of Florida Sexual Predators Act, which requires a sexual offender’s registration, is community notification to ensure that “accurate information be maintained and accessible” to the public (see Fla. Stat. §§943.043, 775.21(3)). Given the ease with which information from Florida’s sexual offender registry can be found, including the proximity of a sexual offender to any given residential property, whether or not a sexual offender lives within a neighborhood may likely be considered public information within the reach and diligent attention of any buyer. Therefore, as in Nelson, the existence of a public record, albeit one that details the location of Florida’s registered sexual offenders as opposed to housing regulations, may likely discharge a homebuilder from any resulting duty to disclose that a sexual offender resides within a property’s vicinity.

Moreover, while Florida has not directly addressed the issue, either statutorily or through existing case law, several other states who have specifically considered the question have determined a seller is without a duty to disclose that a sex offender’s residence is nearby. Specifically, in Glazer v. LoPreste, the Supreme Court of New York Appellate Division held that the presence of a sex offender in the neighborhood was neither peculiarly within the knowledge of the seller nor unlikely to be discovered by a purchaser exercising due care, such that no claim against the seller existed for failing to disclose the information. Additionally, in Arizona, where a couple brought suit alleging they had unwittingly purchased a home located next door to a registered sex offender, the Arizona Court of Appeals held that any claim against the seller was precluded by an Arizona statute preventing civil action against a transferor or lessor of real property who failed to disclose a transferred property was in the vicinity of a sex offender. In other states which statutorily require some disclosure, such as California, a seller of residential property only need notify the buyer that a state sex offender registry exists, with no accompanying duty to provide any additional information. Similarly, in Michigan, Connecticut, Alaska and Washington, the only required disclosure is that public information pertaining to sex offenders exists, such that buyers then have the ability and duty to investigate such information further.

Ultimately, in the state of Florida, a homebuilder need not disclose the residence of a sex offender nearby; however, more express guidance may await legislative action or a suit directly challenging the issue. While proximity to a known sex offender may be considered to materially affect property values, the existence of a public registry suggests that, like Nelson v. Wiggs, the presence of a sex offender in the neighborhood is not a matter exclusively known to the seller, rather it is information contained in a public record within the buyer’s diligent attention. For a buyer, this means that consulting FDLE’s sexual offender registry may be a prudent step towards finalizing any residential property transaction. In practice, homebuilders should consider including the website information for the FDLE’s sexual offender registry in their standard set of community disclosure documents. It is worth noting that while a homebuilder may not have a duty to disclose the proximity of sexual offenders in a neighborhood, where a homebuilder or sales associate undertakes to disclose some facts, the homebuilder must disclose the whole truth and any fraudulent statements or misrepresentations could run the risk of subjecting the homebuilder to suit. Homebuilder sales associates may be well advised that where they find themselves questioned by a buyer, the safest course of action is to point the buyer in the direction of the FDLE registry, thereby enabling the buyer to learn for themselves the proximity of a sexual offender to their prospective home.

If you have questions about your standard disclosure documents or disclosure obligations as a homebuilder selling residential property, please contact one of Shuffield, Lowman & Wilson, P.A.’s homebuilder practice group real estate attorneys.

Landlords and tenants in commercial lease agreements are justifiably concerned about the payment of rent during the COVID-19 crisis. Tenants all over the state are finding themselves unable to pay rent, as well as other monetary obligations under their leases, either as a direct result of the virus or as a result of the various effects of the virus, and are thus left wondering whether they will be evicted from their homes or places of business. For example, the “stay-at-home” orders issued by various state, municipal, and county governments have required many businesses to shut down entirely, eliminating all of the income necessary for the business to keep up with its rent obligations. Meanwhile, many Landlords’ rely upon rent and other monetary amounts paid under the lease to pay off their own obligations, including the mortgage on the property being rented, and are understandably worried about whether they will be able to make the next mortgage payment.

For tenants, relief from upcoming rental payments may come in the form of a “Force Majeure” clause – a clause often contained in contracts, including commercial leases, which excuses performance for various “Acts of God.” However, one should strongly consider all of its various options before choosing to not pay rent and send a landlord notice of a Force Majeure event; the failure to pay rent may result in a default under the lease, which may have repercussions that outlast the current crisis.

Communicate First.
A tenant should not immediately assume that it’s facing a default under the lease simply because he or she cannot pay rent at the current rate. Instead, tenants should first reach out to their landlords and discuss options to avoid a default, such as a temporary deferment or abatement of rent obligations, or a temporary reduction in rent. Likewise, landlords should be reaching out to their lenders to discuss alternative repayment options during the crisis. Commercial lenders may often be less flexible in offering relief, but they also may not necessarily want to go through a foreclosure and take possession of a commercial property which they may not have the resources to manage, and where mortgage payments may resume shortly once things return to normal. Landlords should consider whether there are any obligations they might not be able to comply with, such as co-tenancy requirements, construction of improvements, or maintenance requirements, and negotiate relief from those obligations, as well. Ultimately, it is incumbent on all parties to work together now and avoid conflicts, which may end up far outlasting the COVID-19 crisis itself.

Consider what efforts have been taken by governments to prevent evictions or foreclosures.|
While many governmental orders restricting evictions or foreclosures have focused specifically on residential properties, other governmental entities, such as local court systems, have entered orders creating moratoriums on foreclosure actions and eviction actions that may extend to the commercial context. For example, on April 2, 2020, Chief Judge Donald A. Myers, Jr. of the Ninth Judicial Circuit in Florida, serving Orange and Osceola counties, issued an administrative order suspending all foreclosure actions and sales until May 19, 2020. Such orders do not excuse rent payments or mortgage payments, but they may provide some additional leverage for tenants in negotiations with their landlords, and to landlords in negotiations with their lenders. In general, Court System closures, which have been enacted in various counties across Florida, also provide similar relief.

Review your lease for other provisions that may provide relief from payment obligations.
For example:

Review insurance policies.
Landlords should review their rent loss coverages, and tenants should review their business interruption coverages.

What does the Force Majeure clause say?
Force majeure clauses will only be enforced based on their specific language, which can vary greatly from lease to lease. One should take time to review and understand the force majeure clause before taking any action.

 

Why is the tenant unable to pay rent?
In order for a force majeure clause to excuse the payment of rent or other obligations under the lease, a tenant must be unable to pay rent as a result of the COVID-19 virus, governmental action, or other related circumstances beyond the parties’ control, as applicable. Some questions to ask here include: has someone at the tenant’s business contracted the illness, or has the location been in contact with an infected individual, such that the tenant will have to close its business for purposes of quarantining itself from the public? Has the tenant been ordered or mandated by a governmental entity to close its business?

Economic downturn is not a Force Majeure event – Something that has been an unfortunate result of the current circumstances has been an overall weakening of the economy and financial markets. This alone may not be a Force Majeure event that would excuse the payment of rent. This is a critical distinction for tenants who have been deemed providers of “essential services” for purposes of the “stay-at-home” orders issued by the various governmental authorities. Such tenants, such as restaurants and grocery stores, have been permitted to stay in business, but may nonetheless be experiencing financial strain due to reduced sales. In other words, their inability to pay rent may come more as a result of the economic downturn caused by the COVID-19 crisis, than as a result of the actual force majeure event (i.e. the actual virus itself, or the governmental action resulting therefrom). In that case, it is less certain whether a tenant can successfully claim force majeure.

With so many factors to take into consideration, it can be difficult deciding which avenue is the best to take. Our commercial litigation and real estate teams are here to assist tenants and landlords with navigating this financially trying time by advising our clients on their options based on the specific terms outlined in their contracts.

For more information about whether COVID-19 is considered a Force Majeure event, you can contact us here.

 

In December of 2017, the U.S. Congress established the Qualified Opportunity Zone (“QOZ”) program, designed to help economically-distressed communities where new investments, under certain conditions, may be eligible to generate preferential tax treatment for investors.  Investments made in these designated QOZs through a qualified legal entity referred to as Qualified Opportunity Fund (“QOF”) are intended to provide much-needed new investment and capital into economically depressed communities throughout the United States and Puerto Rico.  In short, the QOZ program is an economic development tool designed to spur economic development, revitalize communities in need, and create jobs in distressed communities by attracting new investments in exchange for select income tax benefits.

In general, here is how the QOZ program operates.  If an investor disposes of assets (e.g., stocks, real estate, an operating business), on or after Dec. 22, 2017, which triggers taxation of capital gains to the investor, then such investor may seek to utilize the QOZ program.  The investor can either create or locate a QOF to invest a portion of its transaction proceeds (e.g., cash) within 180 days of the divestment (sale) transaction date.  Once capitalized, the QOF must, in turn, invest a certain minimum amount of its assets (directly or indirectly) into an operational business or real property located in a QOZ.  The QOF oversees and manages the investment in the QOZ until the QOF decides to divest from the QOZ investment at a future date.  In exchange for this QOZ investment, the QOF receives certain income tax benefits that it passes along and up-the-chain to its owners and investors.

As you can imagine, the rules and regulations governing QOZs and QOFs are complicated and require detailed analysis; the previous paragraph is a rather simple summary of a QOZ transaction.  Below is a list of some very important highlights to keep in mind when considering an investment using the QOZ program.

  1. The investors can defer income taxation on prior capital gains that are invested in a QOF until the earlier of December 31, 2026 and the date on which the investment in a QOF is relinquished (known as the capital gain deferral piece).
  2. If the investor holds the investment in the QOF for longer than 5 years then there is a 10% bonus exclusion of the deferred income taxation on the prior capital gains. If the investor holds the investment in the QOF for longer than 7 years then the bonus exclusion bumps up to 15% (known as the tax basis step-up piece).
  3. If the investor holds the investment in the QOF for no less than 10 years, then the investor is eligible to liquidate or cash-out from the QOF free of income taxation on any new tax gains generated from appreciation of this QOF investment (known as the non-recognition of new taxation piece).

https://deolmsgis.maps.arcgis.com/apps/webappviewer/index.html?id=4e768ad410c84a32ac9aa91035cc2375

As you can see, the rules and regulations governing QOZs and QOFs are complicated and require very detailed analysis.  All facts and circumstances should be taken into consideration when considering, and prior to making, an investment into a QOF using the QOZ program.  Should you have any questions regarding the QOZ program, please feel free to contact Nathaniel Dutt, Esq. at [email protected] or Jordan Horowitz, Esq. at [email protected], or either at 407-581-9800.

If you are unable to qualify for a loan backed by traditional collateral, you can still secure the loan using assets such as art, yachts, accounts receivables or service contracts. At ShuffieldLowman, we can assist borrowers and lenders alike in performing the due diligence necessary to confirm whether traditional collateral will be sufficient or whether non-traditional assets can be used to secure the transaction. Watch as ShuffieldLowman attorney, Jordan Horowitz, explains more about non-traditional asset-based financing.

A very important component to any real estate transaction is the review of a current survey, no more than 90 days old, of the subject property. ShuffieldLowman can assist in reviewing your commercial or residential survey to confirm that aspects such as the legal description, title commitment, and encroachments and access have been examined. Reviewing the survey prior to closing will help avoid any problematic issues down the road. Watch as ShuffieldLowman real estate attorney, John Junod, explains the importance of a survey review in real estate transactions.

PART II — What are the U.S. Tax Implications?

Prospective foreign purchasers of real estate situated in the U.S. should pay careful attention to the U.S. tax ramifications of their acquisition. In particular, the manner in which rental income or sale proceeds are taxed, the impact of repatriation of those profits, and transfer tax consequences, e.g., taxes on the transfer of property to heirs, warrant special consideration.  In addition, there is a somewhat onerous tax withholding requirement imposed on buyers when U.S. real estate is acquired from sellers who are foreign persons, which withholding requirement is elaborated on in Part I of this article.

In many ways the tax consequences of the ownership of U.S. real estate hinge upon the manner in which the real estate is held, i.e., titled in the individual name of the foreign person or owned indirectly by the foreign person through some form of business entity or trust. In addition, the U.S. taxation of foreign persons may be modified by an applicable bi-lateral treaty between the applicable foreign jurisdiction and the U.S.

Depending on the manner in which the foreign person owns the real estate, tax planning in this area generally implicates a combination of some or all of the following goals:

  1. An attempt to minimize taxation of operating income;
  2. The avoidance of a double tax on corporate profits;
  3. To ensure sale proceeds qualify for long-term capital gains tax treatment;
  4. The avoidance of transfer taxes, e.g., estate and gift taxes;
  5. An attempt to minimize withholding;
  6. To avoid taxation of the same income by both the U.S. and foreign tax authority; and
  7. An attempt to minimize tax reporting in the U.S.

In most cases it is impossible to achieve all of these objectives, so the planning needs to be specifically tailored to the particular facts and circumstances of each case.

For example, if a foreign person owns U.S. real estate directly in his or her individual capacity, then the gross rental income attributable to such real estate is subject to a flat 30% tax via withholding unless the foreign person elects “net basis” taxation, in which latter case the graduated income tax rate brackets for individuals apply (up to 39.6%) to net rental income taking account of certain expense deductions allowable depending on the use of the property (personal or business).  If the U.S. real estate is held by the foreign person for more than one year, then the long-term capital gains tax rate (20%) is applicable to the gain on sale. In the case of personal use property, the foreign person and family members can enjoy the use of the property without imputation of rental income but if the “net basis” election is made then deductions are limited to real property taxes and qualified mortgage interest. The big disadvantages of direct ownership by a foreign person are (i) exposure to U.S. estate tax (applies at 40%) in the event of the death of the foreign owner; (ii) that a gift of U.S. real estate by a foreign person is subject to U.S. gift tax without the benefit of the lifetime gift tax exemption available to U.S. persons; and (iii) to ensure the collection of U.S. tax upon the sale of the U.S. real estate, the foreign owner will be exposed to the Foreign Investment in Real Property Tax Act (“FIRPTA”), which, subject to certain exceptions discussed in Part I of this article, requires the buyer to withhold an amount generally equal to 10% of the gross sale price at closing (“FIRPTA Withholding”).

By way of comparison, if a foreign person owns U.S. real property through a foreign corporation, then both U.S. estate tax and U.S. gift tax can be avoided.  This structure also provides the advantages of limited liability and anonymity for the foreign shareholder(s). If shareholders or officers of the corporation will enjoy ‘personal use’ of the U.S. real estate, then a major disadvantage of this structure is the imputation of rental income to such persons; that is, unless the foreign corporation charges fair market value rent to such persons, such rent is imputed to the corporation and will trigger income tax. Another major disadvantage is exposure to the “branch profits tax”, subject to potential reduction via bi-lateral treaty. In lieu of withholding on dividends paid by the foreign corporation that owns the U.S. real estate to its beneficial owners that are foreign persons, the “branch profits tax” imposes a 30% tax on the operating profits of the foreign corporation attributable to the operations of its U.S. real estate that are “deemed” for this purpose to be repatriated to the applicable foreign country. It is important to note that this 30% “branch profit tax” is in addition to the corporate tax on the foreign corporation’s earnings in the U.S. (15% to 35% on net rental income or 30% on gross rental income via withholding by lessee), potentially resulting in an effective tax rate up to 54.5%.  Gain on the sale of U.S. real estate by a foreign corporation is taxable at a 35% rate, and FIRPTA Withholding is required. Thus, if income from the U.S. real estate is expected to be significant and there is no relief available from a bi-lateral treaty then this structure may not be the most attractive option.

There are additional alternative ownership structures that can be utilized, including (i) ownership through a U.S. corporation owned by a foreign corporation; or (ii) ownership through a partnership (U.S. or foreign) or a limited liability company taxed as a partnership; or (iii) ownership though a trust (U.S. or foreign trust, grantor or non-grantor trust).  Again, all of these structures are designed to achieve as many of the above-enumerated planning goals as possible, and the optimal structure always depends on the facts and circumstances of the particular case; that is, there is no ‘one size fits all’ structure.

At the end of the day, foreign persons intent on acquiring U.S. real estate should consult with tax advisors with knowledge of the legion of complex tax rules that confront the foreign owner of U.S. real estate. The failure to do so could easily result in dramatically higher than anticipated tax rates, an inadvertent but costly failure to comply with U.S. tax reporting and compliance rules, and exposure to U.S. transfer taxes as a result of the untimely death of a foreign owner or a gift of the U.S. real estate without proper planning. If you would like to discuss any of these issues, please feel free to contact our firm and we will be happy to evaluate your options.

PART I – Heightened Interest in Tax Implications of Foreign Owner Transfer of a U.S. Real Property Interest

The number of foreign persons investing in U.S. real estate has continued to rise in recent years. The National Association of Realtors reports that foreign buyers purchased more than 104 billion dollars in U.S. real property from March 2014 to April 2015.  Florida was named the state most favored by foreign buyers, garnering twenty-one percent (21%) of the total purchases made by foreign buyers. This trend spotlights the importance of the Foreign Investment in Real Property Tax Act of 1980, I.R.C. § 1445, more commonly known as FIRPTA.  Also, recent changes to FIRPTA made in December, 2015, resulting from the Protecting Americans from Tax Hikes Act, mean the amount of taxes to be withheld on certain transfers of a U.S. real property interest by foreign nationals has increased.

FIRPTA was enacted, in part, to ensure that foreign sellers pay taxes on the sale of a U.S. real property interest.  Under FIRPTA, all sellers of a U.S. real property interest (considered to be transferors) are presumed to be foreign and the burden of proving otherwise is placed squarely on the shoulders of the property buyer. Buyers of a U.S. real property interest, considered to be transferees and withholding agents by the Internal Revenue Services (IRS) for purposes of FIRPTA, must withhold and remit taxes to the IRS in the amount equal to fifteen percent (15%) of the amount realized from the sale of real property (usually the contract price) in order to be protected from any tax liability which the seller fails to satisfy to the IRS.

As the withholding agent, the buyer/transferee is required to remit the tax withheld from the amount realized on the sale to the IRS within twenty (20) days of the property transfer utilizing the appropriate IRS forms which require that the seller/transferor has a U.S. tax identification number. The foreign transferor can have the amount to be withheld reduced if it applies, no later than the day of closing, for a withholding certificate and demonstrates the existence of certain conditions meriting a reduction in the amount of taxes due on the property transfer.

The buyer/transferee is relieved of the withholding requirement if the seller/transferor gives the buyer a certification, signed under penalties of perjury, that the seller/transferor is not a foreign person.  The certification is required to contain the seller/transferor’s name and address, and tax identification number. The buyer can only rely on this certification if the buyer has not been provided with a notice or does not otherwise have actual knowledge that the seller/transferor is a foreign person.

In a buy-sell transaction of a residence for $300,000.00 or less involving a foreign seller/transferor, a buyer is not required to withhold and remit taxes to the IRS if the buyer is an individual and is willing to sign an affidavit stating that the buyer or a member of the buyer’s family will be occupying the purchased residence for at least fifty percent (50%) of the time that the purchased residence is occupied during the first two (2) twelve (12) month periods following the transfer. When the amount realized on the transaction exceeds $300,000.00 but is less than $1,000,000.00, and the buyer, who is an individual, is willing to sign an affidavit stating that the buyer or a member of the buyer’s family will be occupying the purchased residence for at least fifty percent (50%) of the time that the purchased residence will be occupied during the first two (2) twelve (12) month periods following the transfer, then ten percent (10%) of the amount realized must be withheld.  These exceptions to the withholding requirement can benefit the foreign seller because funds will not be withheld from the sales proceeds in an amount up to fifteen percent (15%) of the amount realized; however, they can result in exposing the buyer to liability for taxes, penalties, and interest owed by the foreign seller to the IRS resulting from the sale of the residence.

The withholding rate remains at fifteen percent (15%) when the amount realized is greater than $1,000,000.00 regardless of the use of the property. Likewise, the fifteen percent (15%) withholding rate applies when the buyer is not an individual or when the property will not be utilized by an individual buyer as a residence.

FIRPTA does not apply only to transactions involving residential property; rather, it includes any real property located in the U.S. or the U.S. Virgin Islands, personal property associated with the use of real property, and interests in a mine, well, growing crops, timber or other natural deposits, as well as rents paid to a foreign person (note: withholding rules governing rental payments made to a foreign person are beyond the scope of this article). A foreign person includes non-resident alien individuals, as well as partnerships, trusts, estates, and (certain) corporations and limited liability companies domiciled outside of the United States.  And, whether involving individuals or entities, FIRPTA applies to real property transfers including, but not limited to gifts, sales, exchanges, redemptions and transfers.

Since seller/transferors are presumed foreign, and it is the buyer/transferee’s burden in a transaction involving the transfer of a U.S. real property interest to prove otherwise, or to be saddled with potential tax liabilities related to the disposition of U.S. real property by a foreign transferor, buyers or transferees (other than certain U.S. governmental entities) are advised to seek legal counsel if the seller/transferor is unable to produce the certification described above attesting that it is not a foreign person.