A foreign investor (non-U.S. person) sells a California rental property for $800,000. The property carries a mortgage balance of $700,000. The escrow officer calculates that the combined federal FIRPTA withholding (15%) and California state withholding (3 1/3%) totals about $146,667, which exceeds the seller's net equity of $100,000 after paying off the mortgage. What is the most appropriate course of action?
Correct Answer
A) Advise the seller to apply to the IRS on Form 8288-B for a certificate reducing the withholding, and hold the closing until the certificate issues or the parties agree otherwise
FIRPTA requires 15% of the amount realized to be withheld when a foreign person disposes of a U.S. real property interest, and California adds 3 1/3% of the sales price, here $120,000 plus about $26,667. When that total is more than the sale will actually produce for the seller, the remedy is the withholding certificate: the seller applies on IRS Form 8288-B to have withholding cut to the estimated tax on the gain, and the closing is held until the certificate issues or the parties agree on another arrangement. Only the IRS can authorize less than the statutory federal amount, and the Franchise Tax Board plays the same role for the California portion.
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Related Topics & Key Terms
Key Terms:
Related Concepts
A deed is a written legal document that conveys (transfers) ownership of real property from one party to another. It must be delivered to and accepted by the grantee to be effective.
For a deed to be valid, it must contain several essential elements including a competent grantor, identifiable grantee, consideration, legal description, granting clause, signature of the grantor, and delivery and acceptance.
Escrow is an arrangement in which a neutral third party holds documents, funds, or other items on behalf of the buyer and seller until all conditions of the transaction are met.
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