The Foreign Investment in Real Property Tax Act (FIRPTA in a Nutshell)

Federal Requirements -

There are reporting and withholding requirements for sales of property to or by foreign persons or corporations (IRC §1445). Exchange Intermediaries should be familiar with the basic rules.

Any person who acquires an interest in U.S. real property from a foreign person or corporation must withhold and remit to the Internal Revenue Service a tax in the amount of 10% of the sales price. Form 8288 is used to report and remit the withheld amount.

Although the closer may perform the withholding and preparation of Form 8288, the burden of responsibility is on the buyer of the property. Often closers are not acquainted with these withholding requirements. Failure to withhold the tax may result in the buyer of the property being held liable for the payment of the tax and any applicable penalties and interest. A lien could be placed on the property if it is determined that the buyer failed to comply with the withholding requirement and is found to be liable for the tax.

There are exceptions to the withholding requirement.

· Withholding is not required if the buyer is acquiring the property for use as a residence and the purchase price is $300,000 or less.

· Notification of Nonrecognition Treatment - Withholding is not required if the seller of the property notifies the buyer of the property that the seller is not required to recognize any gain on the sale under Code Section 1031. It is the buyer’s duty to provide a copy of the notice to the IRS within 20 days of the closing date. However, if the buyer has reason to know that the sale is not qualifying under IRC 1031 for nonrecognition treatment; the buyer is not excused from the withholding requirement.

· Withholding Certificate - Withholding is not required if the buyer of the property files Form 8288-B (Withholding Certificate) with the IRS. This form relieves the buyer of the property from any responsibility for withholding and is the desirable method for assurance of compliance with FIRPTA. The buyer of the property should obtain a copy of this form for his files.

In an exchange involving an Intermediary, it is possible that the Intermediary may be perceived as the buyer of the property and therefore be liable for payment of the withholding tax. Even though the Intermediary does not ordinarily take title to the Replacement Property, the Intermediary can be deemed to take and convey ownership of the property by virtue of its responsibilities under the Exchange Agreement. Therefore, the Intermediary should be attentive to the FIRPTA requirements.

What if the Intermediary is assisting the foreign seller of the property with an exchange and the exchange fails or boot is recognized from the exchange? It seems prudent for the Intermediary to transfer the withholding amount to the IRS. This possibility should be provided for in the Exchange Agreement or an addendum thereto.

State Requirements -

Many states have legislation similar to FIRPTA for nonresident sellers of property. All of the concerns that apply to the federal rules also apply to the requirements of each state. Intermediaries must check the requirements of the appropriate state legislation to determine the FIRPTA requirements of each state.

Colorado requires a tax of 2% of the sale price be withheld by the closer of the property unless an affidavit is filed by the seller with the closer that the sale is exempt for various reasons, including a nonrecognition transaction. Usually the title company or an attorney is the closer of the property. A seller would be deemed to be the “closer” if the services of a professional are not used. It seems that the Intermediary in a 1031 Exchange has very little to worry about in Colorado unless the seller is the closer. In any event, the burden is on the closer and not the buyer of the property.

California requires the Intermediary to withhold and pay tax to the Franchise Tax Board at 3 1/3% on cash remaining in an exchange account at the end of an exchange, or 3 1/3% on the entire sale price if the exchangor cashes out completely from an exchange. This withholding requirement applies to all resident and non-resident individuals of California, and non-resident, non-individual tax entities. Resident non-individual tax entities are excused from withholding tax. Thus, Intermediaries must monitor the exchange closely for compliance with California FIRPTA requirements.

Other states may have similar requirements.

Call us at 888-367-1031 or email us at 1031@1031cpas.com if we can help with any questions. See our Exchange Manual and visit us at http://www.1031cpas.com/. 1031 Corporation is the Intermediary of choice for thousands of real estate professionals, CPAs and investors.

EXCHANGES OF OIL, GAS AND MINERAL INTERESTS

Oil, gas and mineral interests are real estate interests which qualify for a like-kind exchange with any other qualifying real estate interest including -
- A fee interest in real estate
- Fractional ownership interests
- 30+ year leasehold interests
- Other oil, gas and mineral interests
- Conservation easements
- Transferable development rights
- Right-of-way easements
- Water rights
- Mutual irrigation ditch stock

A mineral interest is a perpetual interest on all of the minerals on a parcel of land including oil and gas, coal, gold, sand, gravel, water, etc.

There are several different kinds of ownership of oil, gas and mineral interests which include –
- Mineral rights which are a part of fee ownership of the ground.
- Mineral rights which are owned separately from ownership of the ground.
- A mineral lease granted to a lessee by the owner of the mineral rights.
- A royalty interest which can be viewed as a form of rent received by the lessor of the mineral rights.

A mineral lease gives the lessee the right to extract the mineral for a period of time, or until exhaustion of the mineral. Mineral leases are sometimes referred to as a working interest or an operating interest. The lessee is the operator who is extracting the mineral. A mineral lease can be subleased to other operators.

An exchange of a working or operating interest might include equipment or other tangible personal property which would need be viewed as a multi-asset exchange (more than one kind of property).

A production payment is a right to the mineral in place for a specified sum of money, payable out of a specified percentage of the mineral production. It is a “carved out production payment” and is not considered real property for exchange purposes.

Depletion expense can be deducted by the owner of an operating or royalty interest. There are two types of depletion: percentage depletion and cost depletion. Taxpayers use the method that yields the highest deduction.

Intangible drilling costs are operating costs to extract the mineral. Costs for fuel, preparation of a site, and wages are examples of intangible drilling costs.

Mineral property exchanges may be subject to recapture under Section 1254 if deductions were taken for depletion or intangible drilling costs on the relinquished property. The replacement property must be both like-kind and natural resource recovery property (Section 1254 property) to avoid recapture.

Call us at 888-37-1031 or email us at 1031@1031cpas.com if we can help with any questions. See our Exchange Manual at http://www.1031cpas.com/. 1031 Corporation is the Intermediary of Choice for thousands of real estate professionals, CPAs and investors.