Surviving Spouse May be Paid Commission in Some Instances

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Dual Agency Is Prohibited If Ownership Interest Exists

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Personal Property Included in Lease Should be Maintained

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Presence of a Dwelling is Irrelevant to Whether an Affidavit of Disclosure is Required

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Fair Housing Law Protects National Origin

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Seller Must Sign and Deliver Final Acceptance Section of Multiple Counter Offer Form to Create a Valid Contract

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Disclosure Report (Public Report) Required When Selling Six or More Parcels

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Why More Canadians May Sell U.S. Properties in 2016

By Fletcher Wilcox

Many Canadians own residential real estate in Arizona. They are especially attracted to the desert areas of Arizona during the winter when they can soak in the sun rather than shake off the snow.

Many got spectacular deals purchasing residential properties when prices were low and the Canadian dollar was close to being on par with the U.S. dollar.

Changes in the Canadian economy and dollar make it likely that there are now fewer Canadian buyers, but more sellers of their U.S. properties.  According to the Wall Street Journal on February 25, Canada’s economy is under pressure because of a drop in oil prices. In 2015, the Canadian-to-U.S. dollar average was at .75 cents compared to .97 cents in 2011.

Let’s look at a scenario as to why more Canadians may sell their U.S. properties this year than in recent years.

If a Canadian bought a house in the U.S. in 2011 and paid $150,000 USD, they would have paid close to $155,000 CAD.  In 2015, if that same property, because of appreciation, sold for $225,000 USD, a Canadian seller would receive $300,000 CAD, almost double what they paid in Canadian dollars in 2011. Quite a gain. So far in 2016, the Canadian dollar is even weaker against the U.S. dollar than last year.

USD v CAD exchange rate 2010-15

If a Canadian or if any foreigner, decides to sell their U.S. residential property, they should be aware of the Foreign Investment in Real Property Tax Act known as FIRPTA.

FIRPTA is the mandatory withholding of income tax on the disposition of U.S. real property interests by a foreign person(s) defined as a nonresident alien individual, a foreign corporation, a foreign partnership, trust or estate. According to the IRS, not only are sales under FIRPTA, but so are exchanges, gifts and transfers.

On February 17, the FIRPTA withholding tax rate increased up to 15% as demonstrated in the chart below:

FIRPTA demo chart

According to FIRPTA, what is the buyer’s responsibility? A buyer is solely responsible for the FIRPTA withholding tax from a seller.

When the seller is a foreign person? The IRS states:

“In most cases, the transferee/buyer is the withholding agent.  If you are the transferee/buyer you must find out if the transferor is a foreign person.  If the transferor is a foreign person and you fail to withhold, you may be held liable for the tax.”

To help make buyers and sellers aware of FIRPTA, Arizona REALTORS® has addressed it in the Seller’s Property Disclosure Statement (SPDS) and Residential Resale Real Estate Purchase Contract (Resale Contract).

Lines 13 and 14 in the SPDS read:
Is the legal owner(s) of the Property a foreign person or a non-resident alien pursuant to the Foreign Investment in Real Property Tax Act (FIRPTA)? Yes No. If yes, consult a tax advisor; mandatory withholding may apply.

Lines 135-138 in the Resale Contract read:
IRS and FIRPTA reporting: Seller agrees to comply with IRS reporting requirements. If applicable, Seller agrees to complete, sign, and deliver to Escrow Company a certificate indicating whether Seller is a foreign person or non-resident alien pursuant to the Foreign Investment in Real Property Tax Act (“FIRPTA”). Buyer and Seller acknowledge that if the Seller is a foreign person, the Buyer must withhold a tax of up to 15% of the purchase price, unless an exemption applies.

The seller in the Resale Contract agrees to comply with FIRPTA if they are a foreign person; if applicable, the buyer must withhold the tax. In the SPDS, the seller must indicate if they are a foreign person or non-resident alien; if they are, they should consult a tax advisor.

While different settlement agents may have different procedures, escrow officers are not equipped to give tax or legal advice concerning FIRPTA.

The IRS does not require the settlement agent to:

  • Determine a seller’s status as a foreign person
  • Decide how much FIRPTA tax should be withheld
  • Decide if the seller qualifies for an exemption, or
  • Complete FIRPTA forms

What then may a settlement agent do?

IF a buyer has determined that a seller owes FIRPTA tax, the escrow officer may assist them in collecting completed forms and withholding tax from the seller and buyer, and send the forms and taxes to the IRS on behalf of the seller and buyer.  (Remember, there is no duty by the escrow officer to complete FIRPTA documents.)

IF a seller applies for an IRS certificate exempting or reducing FIRPTA withholding tax prior to the transaction closing, it is likely that the certificate from the IRS will not be received until post-closing.  A settlement agent may agree to hold FIRPTA funds post-closing and send the funds to the IRS if certain conditions are met prior to the closing.  If the required conditions are met, then both the buyer and seller will have to sign post-closing holdback instructions.

IF the requirements of a post-closing holdback are not met, the seller and buyer will have one of two options.  The settlement agent may collect the proper forms and send in the withholding tax at the time of the closing.  Or the seller and buyer mutually agree in writing that the FIRPTA funds may be transferred to an attorney or CPA’s trust account.  The attorney or CPA will be responsible for the FIRPTA withholding amount.

Tips
If there is a FIRPTA withholding, both the seller and buyer will need either a social security number or a valid U.S. Individual Taxpayer Identification Number (ITIN) in order to process FIRPTA documents. If someone is not eligible for a social security number, they must apply for an ITIN.

Because of the length of time it may take to receive either a social security number or ITIN, it is a good idea to obtain one before a property is put on the market.

Also, talk with the escrow officer where the escrow will be processed prior to contract acceptance to find out what the officer will do on a FIRPTA transaction and what requirements must be met for a post-closing holdback.

A seller and buyer should always consult with a qualified CPA or tax attorney regarding FIRPTA.

Conclusion
In 2016, the Arizona real estate market will likely see more FIRPTA transactions with foreigners, specifically Canadians, selling their U.S. properties.  A knowledge of FIRPTA by both the foreign seller and buyer will help ensure a smother closing.

Fletcher R. Wilcox is vice president of business development at Grand Canyon Title Agency    

Other Advisories

Buyer Advisory

Information & Updates


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Form updated: March 2016

Buyer Advisory in Spanish

Actualizado: Marzo 2016


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Content and website addresses (links) within the Buyer Advisory were up-to-date at the time of posting, but may change periodically without notice. If you find a link that is broken, please email Jan Steward with the details.


REMINDER: This Advisory is supplemental to obtaining professional property inspections. Professional property inspections are absolutely essential; there is no practical substitute for a professional inspection as a measure to discover and investigate defects or shortcomings in a property.

Revisions as of March 2016 consist of:

  • Pg. 5, #17 –Foreign Investment in Real Property Act (FIRPTA)
  • Included a new link to an I.R.S. video link to further understand of FIRPTA withholding
  • Pg. 6, #4 –Swimming Pools and Spa
  • Included new content to assist the buyer in investigating swimming pool regulations
  • Pg. 7, Soil Problems
  • Included the Arizona Geologic Survey website which offers a viewer/map for Earth Fissures, Active Faults, Earthquake Epicenters, Flood Potential and Fire Risk Index
  • Website links have been updated throughout the Buyer Advisory

REALTORS®: To ensure that your clients receive only the latest version of the Buyer Advisory, we recommend that you copy the link below and paste it into an email to your client. When your client clicks this link, they will automatically read the current version on file.

www.aaronline.com/manage-risk/buyer-advisory-3/

(NOTE: Not all PDF readers are created equal. If you are having trouble clicking on hotlinks in PDFs, you may need to open the file in a more robust program. For example, iPad users might invest in an app such as Goodreader or iAnnotate.)


Buyer Acknowledgment & Disclaimer

Buyer acknowledges that there may be other disclosure issues of concern not listed in this Advisory. Buyer is responsible for making all necessary inquiries and consulting the appropriate persons or entities prior to the purchase of any property.

The information in this Advisory is provided with the understanding that it is not intended as legal or other professional services or advice. These materials have been prepared for general informational purposes only. The information and links contained herein may not be updated or revised for accuracy. If you have any additional questions or need advice, please contact your own lawyer or other professional representative.

If you know of any websites that you feel would be beneficial for the Buyer Advisory, please contact Jan Steward.


Buyer Advisory in Spanish

Consultor de comprador

RECONOCIMIENTO DEL COMPRADOR

El comprador reconoce que puede haber otras divulgaciones importantes que no aparezcan en esta Guía de Asesoría. El comprador tiene la responsabilidad de hacer todas las averiguaciones necesarias y consultar con las personas o entidades pertinentes antes de realizar la compra de cualquier propiedad.

Esta Guía de Asesoría se suministra con el entendimiento que estos consejos no constituyen servicios o consejos legales o de peritos. Estos materiales se han preparado únicamente como información general. La información y los enlaces que contiene esta Guía no pueden actualizarse ni revisarse para verificar su exactitud. Si usted tiene alguna pregunta adicional o necesita asesoría profesional, por favor contacte a un abogado u otro profesional de su elección.

Descargo de responsabilidad

Este documento ha sido traducido del idioma inglés al idioma español. Se proporciona esta traducción con el entendimiento expreso de que la Arizona Association of REALTORS® (“AAR”) no está prestando el consejo o servicios legales ni otro consejo o servicios profesionales. La AAR no hace ninguna exposición respecto a la exactitud o lo completo de la información contenido en esto y expresamente niega toda responsabilidad de cualquier pérdida o daño relacionado con el uso de esta traducción.

Translation Disclaimer

This document has been translated from the English language to the Spanish language. This translation is provided with the express understanding that the Arizona Association of REALTORS® (“AAR”) is not rendering legal or other professional services or advice. AAR makes no representations as to the accuracy or completeness of the information contained herein and expressly disclaims all liability for any damage or loss related to the use of this translation.


Page updated 3/8/2016