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Hot New York Real Estate Topics

Hot New York Real Estate Topics

To supplement our previous “complete guide to purchasing an apartment in New York City”: {link here}, we want to bring several other issues to the attention of the foreign buyer:

The 15% FIRPTA withholding tax for foreign buyers who are selling a property

The Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) requires a seller who is a foreign person (person can include a foreign corporation or partnership) to temporarily withhold 15% of the total purchase price with the IRS.  This tax is withheld in case the seller owes the IRS taxes.  Technically, the buyer’s attorney must be diligent because if the tax is not withheld then the buyer is liable to the IRS for any taxes that the foreign seller owes.

This law does not apply to green card holders and other resident aliens.  But even if the person does not have a greencard, the tax does not apply if the foreign seller has resided in the U.S. for more than 31 days in the calendar year before selling the property, or has resided in the U.S. for more than 183 days in a three year period.

The seller’s attorney can also apply for reduced FIRPTA withholding certificates with the IRS before the closing of the property or even an exemption if certain conditions are met.

1031 Exchange When Selling a Property Can bring Significant Tax Savings

IRS code Section 1031 allows a seller to defer taxes for an investment property, which can become a significant tax savings over time.  The primary rules are that :1) the seller of the property must be the buyer of the new property; 2) the new property to buy must be identified within 45 days of the closing of the property sold; 3) the purchase of the new property must be within 180 days of the closing of the property sold; 4) the price of the new property must be equal to or greater than the property sold; 5) the new property must be for investment purposes; and 6) the parties of the transaction must be related.

In principal, this type of transaction is a simultaneous exchange of one property for the other and the IRS allows the property owner to postpone paying tax on the gain if the money is reinvested in a property of equal or higher value.  It is a great tool for those investing in real estate.  Usually, the seller of the property will hire a company that specifically deals in 1031 exchanges to act as an intermediary to hold the money before buying the new property.  This is because any cash that is realized from the sale of the first property by will suddenly become taxable.  But it is important to pick a reputable company to be the intermediary because there have been instances of companies going bankrupt in between the selling and buying of property.

Requirement to Disclose Properties Bought with Shell Companies

In July of 2016 the Financial Crimes Enforcement Network (FinCen) of the U.S. Department of Treasury issued an update to their January 2016 rule requiring disclosure of properties being bought by shell companies.  The new rule, coming after the infamous “Panama Papers”, expands the geographical reach of the previous rule.  Now, properties bought by shell companies in Manhattan, New York City over $3 million dollars must be disclosed to FinCen.  Properties in the surrounding four boroughs of New York City of Brooklyn, Queens, Staten Island and the Bronx must now disclose cash deals over $1.5 million.

In Miami, purchases of $1 million or more by a shell company must be disclosed.  In California, Los Angles, San Diego, and three counties that are part of San Francisco must disclose shell company purchases of $2 million or more.  In San Antonio Texas, the amount is $500,000 and above.

This new rule will go into effect on August 28, 2016 and will last for six months.  FinCen claims that this rule is temporary, but the previous rule began on February 2016 and lasted until August of 2016 and only included Manhattan New York and Miami-Dade County Florida.  This updated rule aims to attack money laundering and illegal activity.

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