FIRPTA - 1099 s Cash 1099 Reporting - Agent Plus Realty

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1099-S, CASH REPORTING,
FIRPTA AND FEDERAL
ISSUES AT CLOSING
Presented by:
Lee Offir
Underwriting Counsel
Title Resources Guaranty Company

The underlying purposes of the 1099 reporting
regulations and the FIRPTA reporting and
withholding regulations are to assist the federal
government in income tax collection.
2
Income Tax Collection

 In general, profit made on sale of real estate is
taxable as a capital gain, unless:
● Property was owned and used as primary
residence for two of last five years; and
● Profit does not exceed $250K ($500K if married)
 “Profit” calculated by taxpayer on income tax
return.
 Details are set forth in IRS Publication 523.
3

 In order for the IRS to have accurate
information about the profit, settlement agents
are required to report certain transactions to
the IRS.
 The settlement agent
reports the facts; the tax
liability is determined by
the taxpayer and the IRS.
4

When the federal income tax was first instituted,
the rate for the top income bracket was:
A. 2% D. 15%
B. 7% E. 21%
C. 10% F. 33%
5
Trivia Question

Trivia Question
Answer: 7% for $500,000 or more; Anyone
who made $20,000 or more paid a minimum of
2%
6

7
General Rule:
 A person responsible for closing a transaction
is required to report a transaction that consists
in whole or part of the sale or exchange of any
real estate on IRS Form 1099-S.
 The settlement agent must provide a copy of
the 1099-S, as reported to the IRS, to the
seller by January 31 of the following year. In
reality, the form is usually provided to the seller
at closing.
1099-S Reporting

8
Make sure to use the current year form.
1099-S Reporting

9
1. The residence of the seller, provided:
● Sales price does not exceed $250,000 for a single
seller, or $500,000 for a married couple; and
● Sellers certify that the full amount of any gain on the
sale is exempt from income tax.
1099-S Reporting - Exceptions

10
2. The seller is a corporation
or governmental unit.

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3. The seller sold at least 25 separate properties
to at least 25 separate transferees in either of
the last two years, or expects to do so this
year.
● A certification from the seller is required.

12
4. Gifts
5. Deeds in Lieu of Foreclosure
6. Sales for less than $600

13
A married couple who
owns the property
together is treated as a
single seller.
In other multiple seller
situations, separate
1099-S forms are filed
for each seller.
1099-S Reporting - Guidelines

Partnerships: Reported under the name and tax
identification number of the partnership, not
individual members.
Limited Liability Companies: Reported under the
name and tax identification number of the LLC,
unless it is a single member LLC treated as a
“disregarded entity” by the IRS, in which case it is
reported under the social security number of the
individual member.
14

1031 Exchanges and Relocations: The Seller is
the reportable entity, not the 1031 exchange
company or the relocation company.
Trusts and Estates: Reported under the tax ID
number assigned to the trust or estate, not under
the beneficiaries’ numbers.
15

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A settlement agent is not permitted to charge a
separate fee for complying with these filing
requirements, but may take into account the cost
of completing and filing the form when setting the
fees charged to customers for services in real
estate transactions.
1099-S Reporting

What if your Seller is an entity but wants reporting
under the names of its individual owners?
● The settlement agent is required to report
under the name of the entity in title, unless the
single member LLC disregarded entity
exception applies.
What if the Seller wants reporting under some
other number?
No, No, No. Never, Ever, Ever! ! !
17
1099-S Reporting - Scenarios

The Seller is foreign and does not have a social
security number or tax identification number.
● Seller should apply for a TIN using IRS Form W-7.
The Seller is not foreign and refuses to provide a
social security or tax identification number.
● The transaction will not close. Doing so could subject
the settlement agent to a fine by the IRS.
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1099-S Reporting - Scenarios

19
Anyone who receives more than $10,000 in
currency (cash) in a business transaction from the
same buyer (or agent) must report this receipt to
the IRS if received in:
● A single transaction; or
● Related transactions
over up to 12 months.
Cash Reporting

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In addition to bills and coins, the term “cash”
includes cashier’s checks, bank drafts, traveler’s
checks, and money orders of $10,000 or less if
the recipient knows that the payer is trying to
avoid the reporting requirement.
Cash Reporting

21
 The report is filed
on IRS Form 8300.
 It must be reported
within 15 days of
receipt of cash.
Cash Reporting

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 The settlement agent may
voluntarily report a
“suspicious transaction.”
 If it is a “suspicious transaction,” the agent
does not have to notify the person from whom
they received the cash of report. Otherwise,
the agent must notify the person by January 31
of the following year. Usually, its provided at
closing.
Cash Reporting

23
 FIRPTA is an acronym for the Foreign
Investment in Real Property Tax Act.
 It drafts settlement providers into service as
collection agents for the IRS when certain
foreigners are selling real
estate in the United States.
FIRPTA – The Foreign Seller

25
 If a “foreign person” is transferring any real
property interest, the purchaser must deduct
and withhold the percentage of the sales price,
not the net proceeds.
 Although the statute says the purchaser must
withhold the funds, as a practical matter, the
purchaser often expects this to be done by the
settlement agent.
FIRPTA – General Rule

26
Who is a “foreign person”?
A. An individual who is not a citizen or legal resident
of the United States;
B. Foreign partnerships;
C. Foreign trusts or estates; or
D. Foreign corporations that have not elected to be
treated as domestic corporations.
FIRPTA – Is Seller a Foreign Person?

1. Green Card Test: A resident alien with a
“green card” is a legal resident of the U.S.,
and thus not a “foreign person.”
27

2. Substantial Presence Test: An individual is not
a “foreign person” if s/he is physically present
in the U.S. on at least:
● 31 days during the current calendar year; and
● 183 days during the current calendar year and
the two preceding years, counting:
− All of the days here in the current year;
− 1/3 of the days here 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.
28

Your sellers were physically present in the United
States for 120 days in each of years 2015, 2016
and 2017. To determine if they meet the
substantial presence test, count:
● 120 days of presence in 2017,
● 40 days in 2016 (1/3 of 120), and
● 20 days in 2015 (1/6 of 120).
Since the total for the 3-year period is 180 days,
your seller is not considered a resident under the
substantial presence test for 2017.
29
Substantial Presence Example

30
How it Seems When You Do the Math

31
3. A business entity formed outside of the United
States is a “foreign person.”
4. An entity that is formed in the U.S. but is
owned by someone other than a U.S. citizen
or resident alien and is a “disregarded entity”
for tax purposes is a “foreign person.”
● Partnerships
● Most LLC’s
● S Corporations

 Generally, the settlement agent will rely on a
Certificate of Non-Foreign Status from the
seller. It must include the seller’s address,
social security or tax identification number and
an affirmative statement that he/she is not a
foreign person as defined by the Act.
 All statements are made under penalty of
perjury.
32

 If one seller is a foreign person and the other is
not, withholding is required on the portion of
the sales price attributable to the foreign
person. (50/50 is presumed with married
couples).
 For example, if one of two sellers is a foreign
person and the sales price is $500,000, the
amount to withhold is $25,000. (10% of ½ of
$500,000.)
33

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According to the IRS, the transferee/buyer, or a
member of the family, “must have definite plans”
to reside at the property for at least 50% of the
number of days the property is used by any
person during the first 12 month period following
the date of transfer (not years).
FIRPTA – What Constitutes a Residence?

 If the property being acquired will be used as
the transferee/buyer’s or a family member’s
residence, withholding is:
● If purchase price is less than $300,000 = 0%
● If the purchase price is more than $300,000 but not
more than $1,000,000 = 10%
● If the purchase price is greater than $1,000,000 =
15%
 If the property will NOT be used as the
transferee/buyer’s or their family member’s
residence = 15%
35
Tiers for Withholding

36
What is the “amount realized”?
● Generally, it is simply the sales price.
● It also includes the value of any other
property being transferred and the amount of
any unreleased liens on the property.
● It is NOT the net proceeds.
FIRPTA – If So, Does an Exemption Apply?

 Although Purchasers often look to the
Settlement Agent for assistance in meeting
FIRPTA requirements, compliance with the
requirements is ultimately the responsibility of
the Purchaser, not the Settlement Agent.
 Settlement Agents are encouraged to obtain
from Purchasers written waivers of the
settlement agent’s responsibility when FIRPTA
withholding is required.
37
FIRPTA – Withholding Procedures

38
Remittance to the IRS is
required within 20 days
of closing, together with:
Form 8288:
and Form 8288-A:
FIRPTA – Withholding Procedures

39
 The IRS can issue the foreign seller a
Withholding Certificate, stating withholding is
not required, if the foreign seller is:
● Exempt from federal tax; or
● Has a separate agreement with IRS for payment.
 If a foreign seller claims to be exempt, the
settlement agent will require the Withholding
Certificate prior to closing! It will take a
minimum of 45 days for the IRS to issue.
FIRPTA – Alternatives to Withholding

40
Notice of Non-Recognition of Gain/Loss.
 Seller provides a notice, signed under
penalties of perjury, stating that it is not
required to recognize gain or loss on the
transaction by reason of a specific Internal
Revenue Code provision.
 This notice must also be filed with the IRS
within 20 days of closing.
 This is not favored and/or not recommended.
FIRPTA – Alternatives to Withholding

What if the Seller refuses or is unable to provide a
tax identification number?
● Require a certificate to this effect from the
seller.
● Report to the IRS that the seller does not
have TIN.
● It generally is in the interest of the seller to
have a TIN, because any refund of the
amount withheld will not be delivered to a
seller who does not have one.
41
Objections to Reporting

In addition to being legal requirements,
compliance with these regulations are usually
contractual requirements under most earnest
money contracts.
42
Objections to Reporting

43
A lien to secure the payment of any federal
estate tax that is due attaches to all property
owned by the decedent at the date of death.
It does NOT have to be
recorded.
Federal Estate Tax

44
Whether or not a particular estate is taxable may
depend upon when the person died, because the
amount of the estate that is exempt from taxation
varies year by year.
2006-2008: $2,000,000
2009: $3,500,000
2010: Unlimited – No Tax
2011: $5,000,000 2015: $5,430,000
2012: $5,120,000 2016: $5,450,000
2013: $5,250,000 2017: $5,490,000
2014: $5,340,000 2018: $11,180,000
2019: $11,400,000
Federal Estate Tax

45
 If the value of the estate falls below the
applicable threshold, then no requirements
relating to federal estate taxes are necessary.
 The settlement agent will rely on the prepared
state inheritance tax return to determine if
federal estate taxes are due.
Federal Estate Tax

46
NOTE: The federal estate tax is not the same
thing as an “inheritance tax.”
Inheritance taxes are imposed by some, but not
all, states.
Federal Estate Tax

47
 An abstract of judgment in
favor of the United States
creates a lien on the property
of the judgment debtor.
 The lien continues for a period
of 20 years and may be
renewed for an additional 20
years.
Creation of a Federal Judgment

48
A federal judgment lien against a purchaser of
property may be superior to the purchase money
lien. Therefore, buyers’ names must be searched
for federal judgments.
Priority of a Federal Lien

49
 A federal judgment is inferior
to any liens recorded prior to
the abstract of judgment.
 However, notice of the
foreclosure sale must be given
to the United States Attorney’s
office. The lien survives the
foreclosure if notice is not
given.
Impact on Foreclosures

50
 Even if proper notice is given, the federal
government has the right to redeem the
property for a period of one year following the
date of the foreclosure.
 The feds pay the lender the balance of the
loan and take the equity in the property.
 This right impairs the
marketability of the
property for a year
following the foreclosure.
Impact on Foreclosures

51
A federal restitution lien is a lien on property of a
person convicted of a federal crime, to secure
payment of restitution to the victim.
Federal Restitution Lien

52
 A restitution lien has the same priority of a
federal abstract of judgment and is treated the
same way for title examination purposes.
 It also has the same impact upon foreclosures,
including the notice requirements and right of
redemption.
Federal Restitution Lien Priority

53
 A lien attaches to all property and interests in
property of a person or entity in order to secure
the payment of federal taxes.
Federal Tax Liens

54
 It can be for non-payment of any type of tax
liability, including:
● Personal income tax.
● Gift tax.
● Tax owed by an entity for
which the individual is
the “responsible party.”
Federal Tax Liens

55
 A “responsible party” of an
entity is personally liable for
payroll withholding that is
not remitted to the IRS.
 Thus, an individual may be
liable for payroll taxes that
are not paid by a corporation
or other entity.
Federal Tax Liens - Payroll

56
A tax lien attaches to all community property of the
taxpayer, regardless of which spouse holds record title.
Federal Tax Liens & Community Property

57
 What if your spouse has a federal tax lien?
● It does not attach to your separate property.
● It does attach to your community property.
● It does attach to property you hold as joint tenants or
tenants by the entirety.
Federal Tax Liens & Marital Property

58
 A federal tax lien against the beneficiary of a
will or intestate heir attaches to property
inherited by that person.
 The taxpayer cannot disclaim
the inheritance to avoid
the tax lien.
Federal Tax Liens & Inheritance

59
If there are multiple heirs, one of
whom has a federal tax lien, the lien
attaches to the undivided interest of
that heir in the property.
If the value of that interest is less
than the tax liability, the IRS generally
will partially release the lien from the
property in exchange for the share of
the taxpayer’s net proceeds from a
sale of the property.
Federal Tax Liens & Inheritance

60
 A federal tax lien is inferior to any interest that
is recorded prior to the recordation of a Notice
of Federal Tax Lien.
 A federal tax lien against a purchaser is inferior
to the purchase money mortgage. (This differs
from federal judgment and restitution liens.)
Federal Tax Lien Priority

61
 If a Notice of Federal Tax Lien is recorded at
least 25 days prior to the foreclosure sale,
notice of the sale must be given to the IRS.
 If notice is not given, the tax lien survives the
foreclosure.
 Even if notice is given, the IRS has a period of
120 days from the date of the foreclosure sale
to redeem the property.
Priority in Foreclosure

63
 The last four digits of the
taxpayer’s social
security or taxpayer
identification number are
shown.
 However, for joint
taxpayers (typically a
married couple), only the
number of the first
person named is shown.
Notice of Federal Tax Lien

64
 The notice will contain
one or more “last days
for refiling.”
 Once the latest last day
for refiling has passed,
the notice of tax lien is
effectively barred by
limitations and may be
disregarded.
Notice of Federal Tax Llien

65
CAUTION!
 If your client is paying off a federal tax lien at
closing, you can not rely on the figures in the
notice of tax lien. Additional taxes, penalties, and
interest may have accrued.
 Always get a payoff from the IRS.
Notice of Federal Tax Lien

66
Certificate of Release:
● A full release of the federal tax lien. See IRS
Publication 1450.
Certificate of Discharge:
● A partial release of the property from the federal tax
lien. See IRS Publication 783.
Certificate of Non-Attachment:
● To prove non-identity when dealing with similar
names. See IRS Publication 1024.
Certificate of Subordination:
● To subordinate the federal tax lien to a home equity
or investment cash out loan. See IRS Publication
784.
Addressing a Federal Tax Lien

67
The USA Patriot Act is an acronym for the
“Uniting and Strengthening America by Providing
Appropriate Tools Required to Intercept and
Obstruct Terrorism Act of 2001.”
USA Patriot Act

68
 The United States Office of Foreign Assets
Control maintains a list of “Specially
Designated Nationals.”
 United States citizens and permanent
residents are forbidden from doing business
with any person listed as a Specially
Designated National.
 Official information may be found at
www.treasury.gov/resource-
center/sanctions/SDN-list
USA Patriot Act

69
 There are many common names on the list.
 An affidavit of non-identity from your client is
acceptable proof to the settlement agent that
he or she is not the same person as the one
shown on the list.
USA Patriot Act

70
The United States Department of Housing and
Urban Development (“HUD”) was created during
the administration of which President?
A. Franklin Roosevelt
B. Dwight Eisenhower
C. Lyndon Johnson
D. Richard Nixon
E. Jimmy Carter
Trivia Question

71
The Consumer Financial Protection Bureau is a
new federal agency, which began operations in
July, 2011. One of its first actions was to
completely overhaul the settlement process.
Consumer Financial Protection Bureau

72
 It was created pursuant to the Dodd-Frank Act,
for the purpose of “promoting fairness and
transparency for mortgages, credit cards, and
other consumer financial products and
services.”
 You’ve all felt the
impact since
October 3, 2015.
Consumer Financial Protection Bureau

74
Questions?
Thank You For Attending!

FIRPTA - 1099 s Cash 1099 Reporting - Agent Plus Realty

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