Category Archives: Featured

Is the Seller a “Foreign Person”? Buyers, FIRPTA Says You Better Find Out

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ID-10075952This is not legal advice. For legal advice, consult an attorney in person about your specific situation. Never rely on a blog. [Updated 12/17/14]

The Foreign Investment in Real Property Tax Act (FIRPTA) is a federal law that requires a “foreign person” to pay tax on the gain realized upon the sale of real property owned by that person. However, the law does not make the seller responsible for paying this tax.  Rather, the law requires the buyer to determine whether or not the seller is a “foreign person” (basically a non-resident alien).

If the seller is a “foreign person” as defined by the statute,then the buyer must withhold 10% of the sale proceeds at closing. These funds are to be forwarded to the IRS to insure that the foreign person pays tax on the gain realized from the transfer. If the buyer fails to determine that the seller is a foreign person and thus fails to withhold 10% of the proceeds, the buyer is liable for the 10%. WOW! That’s significant. If you just bought a $400,000 house from a foreigner and did not satisfy your obligations under this statute, you may be liable to the IRS for a cool 40 grand. Ouch.

The NWMLS, recognizing the serious risk to buyers, has included a “FIRPTA” provision in the standard Purchase and Sale Agreement (PSA):

j. FIRPTA – Tax Withholding at Closing. The Closing Agent is instructed to prepare a certification (NWMLS Form 22E or equivalent) that Seller is not a “foreign person” within the meaning of the Foreign Investment in Real Property Tax Act. Seller shall sign this certification. If Seller is a foreign person, and this transaction is not otherwise exempt from FIRPTA, Closing Agent is instructed to withhold and pay the required amount to the Internal Revenue Service.

So that’s good news! The PSA specifically instructs the closing agent, aka escrow, to make sure the buyer complies with this legal obligation.  Whew!

Wait, there’s bad news? Yep. Virtually every escrow company has its own “escrow instructions” that elaborate on the terms of the PSA.  And guess what?  Those instructions relieve the escrow agent from taking any steps to make sure the buyer complies with FIRPTA.  Here is the language from some commonly used escrow instructions:

Seller warrants to Escrowee [i.e., the Closing Agent] that if Seller is an individual, Seller is a non-resident alien for purposes of U.S. Income taxation, or if Seller is a corporation, partnership, trust or estate, Seller is not a foreign entity. The Foreign Investment in Real Property Tax Act of 1980 as amended by the Tax Reform Act of 1984 places special requirements for tax reporting and withholding on the parties to a real estate transaction where the transferor (seller) is a non-resident alien or non-domestic corporation or partnership or partnerships. It is understood and acknowledged by the undersigned that (a) Escrowee will not take an active role in either the determination of the non-alien status of the seller transferor or the withholding of any funds; and (b) Escrowee makes no representations and (c) Buyer and Seller are seeking an attorney’s, accountant’s, or other tax specialists opinion concerning the effect of this Act on this transaction and are not acting on the statements made or omitted by the Escrowee.

So what protection the PSA provides, the escrow instructions take away. “Whew!” is grossly premature.

Obviously, “consulting with an attorney or other specialist” is simply the escrow company engaging in a little CYA.  The closing agent, and only the closing agent, is in a position to obtain the necessary signed certification. The PSA instructs the closing agent to do so.  But the closing agent promptly tells the buyer that it will not do so. If you’re a buyer in this situation, watch out. You could get some exceptionally bad news from the IRS long after you’ve purchased the home.

Not convinced? Check out my follow-up post where I flesh out my opinion with those of several other residential real estate lawyers.

Finally, this is a fantastic illustration of how a buyer can benefit from having an attorney on board from the get-go. At Quill Realty, we provide every client with an attorney (and we pay the attorney’s fee). So if you’re a Quill client, you can rest assured that your attorney will identify and resolve this issue (usually by demanding that the closing agent comply with the terms of the PSA and not those of the escrow instructions, to which they usually agree).  Not a Quill client?  Well, good luck in seeking to eliminate this very substantial post-closing exposure to the IRS…

10 Things You Should Know Before Moving to Seattle

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Where do you find inspiration?

Out of all the places to find inspiration for a blog post, my current favorite is deep within the RCG stats where I can find the search terms that people use to reach this site. Today, someone came to RCG looking for: [things+you+should+know+before+moving+to+Seattle], and while we likely disappointed that particular visitor, I would like to make amends by offering up this list of ten things you should know before moving to Seattle:

rain in Seattle1) It rains.

2) No really, it rains a lot here. Despite what they say about it raining more in Atlanta, Boston, or D.C., the rain in Seattle can be like a slow trickle that never turns off. But the rain is okay… really… because one day… some day… it stops. And on those first few warm, sunny spring days, all of life is good in a way that Californians will never understand (unless they move to Seattle).

3) Seattle isn’t always comfortable being a high-tech town. Sure we design operating systems, sell stuff online, try to appraise every home in America and stream lots of music and movies, but a substantial portion of the population relates much more to the art of building airplanes.

4) Consensus Rules. Just agree with me on this one or I’ll never be able to get to #5.

5) Traffic Rules. People in Seattle talk a lot more about traffic than the weather. Depending on where you are moving from, traffic will either be horrible or a non-issue. Most blue-state people will laugh at Seattle traffic because you can normally get between any two points in the City in under a half-hour at all times of the day. Red-state people see the parking lot known as SR 520 and wonder why we haven’t build another bridge yet (see #4 for a hint at the answer).

6) Seattle is not that big. We have all the stuff associated with life in a major city: Theaters, traffic, ballets, sports teams, traffic, skyscrapers, music, etc., but you really don’t have to travel far to feel like you are in rural America.

7) Seattle is closer to Asia than Mexico. If one of the staples of your diet consists of cheap and tasty Mexican food, then you will eventually replace that staple with Pho. The sooner you accept this (and the sooner you stop saying “The Mexican food is so much better in California”), the sooner Seattleites will let you know about the good Asian restaurants. (And by the way, since we’re talking about good food, I feel obliged to mention that the Mexican food I remember growing up with in California was so much better than anything you can find in Seattle…)

8) The intersection of NE 50th St and 40th Ave NE is about a mile away from 50th Ave NE and NE 40th St. In the Seattle area, all the street names are numbered and given one of nine directions (NW, N, NE, SW, S, SE, E, W or blank). The numbers begin at 1 in downtown Seattle and radiate out wards. The directions also radiate out, but are city specific, unless, of course, they aren’t… Like at the intersection of 244th St SW, 100th Ave W, N 205th St and 8th Ave NW. There is logic to the entire street system and if you live here long enough, you will understand. Until then, you will be confused and miss appointments, meetings, birthdays, etc.. On a related real estate note, if you are new to Seattle, do not attempt to search for a home without a real estate agent. The street system was designed by a committee of real estate agents who wanted to ensure that you need their help to locate a home. 😉 Also on a related note, Redfin has proposed new street names (featuring real names) for all streets in a effort to ensure the viability of their business model, but at this point, they are still very far from getting consensus on their proposed naming convention.

9) Paul Allen.

10) Despite what you might have read in Wired, Fremont is the Center of the Universe.

Have I covered everything?