Buying Or Selling
Property in Arizona
As
A Foreign Investor
Foreign Investor Guide
THE FOREIGN INVESTMENT IN REAL PROPERTY TAX ACT
(FIRPTA)
FIRPTA’s objective is to ensure non-resident aliens file U.S. income tax returns and pay taxes on profits generated in the
U.S.
FIRPTA requires that 10% of the total amount realized (generally the
Sales Price) be withheld and forwarded to the IRS whenever the Seller is a
“Foreign Person” (Non-Resident Alien of the United States). It also applies to foreign corporations, trusts, etc.
FIRPTA imposes the obligation to withhold upon the
BUYER, and the IRS may hold the Buyer, Agent(s) or the Title Company responsible for
any taxes owed by the foreign seller if no withholding is done.
The required withholding may be applied to
any tax liability owed by the Seller….not just capital gains taxes, nut also to include such taxes as
payroll tax, income tax, etc. The IRS keeps the held funds until a determination is made regarding any taxes owed by the Seller. After proper filling
of applicable tax returns and deduction of applicable taxes, the remaining funds are returned to the Seller by the IRS.
Buyer and Seller must direct the title company to withhold under FIRPTA, Otherwise, title company will not close the transaction without one of
the
following;
Exemption Certificate from IRS indicating no taxes are due.
Fully executed Foreign Investor Certificate declaring an exemption.
Seller must have a US Tax ID number in order to withhold. The Seller should make application for a TIN as soon as possible, or the TIN may be
applied for at the same time the withholding is made at close of escrow. If Seller can not, or will not, provide a U.S. TIN then Seller will not receive
any refund of money held. NOTE: Line 127-130 of the Purchase Contract states
“Seller agrees to comply with IRS reporting requirements.
If applicable, Seller agrees to complete, sign and deliver to title company a certificate indicating whether Seller is a foreign person
or a non-resident alien pursuant to the Foreign Investment in Real Property Tax Act (“FIRPTA”). Buyer and Seller acknowledge that if
the Seller is a foreign person, the Buyer must withhold a tax equal to 10% of the purchase price, unless an exemption applies.”
Heavy penalties and fines are possible for failure to withhold, and for improper withholding or failure to send the funds to the IRS within 20 days
after the closing. The IRS will look to the buyer for ALL taxes, penalties etc
.
DETERMINING IF FIRPTA APPLIES
If the seller is
not a “foreign person” he/she is exempt. A “W-9” or other non-foreign Affidavit may be used to document the exemption. This
exemption can be signed by the following:
1.
U.S. Citizen
2.
U.S. Green Card Holder
A non-citizen who meets the substantial presence test. (A detailed explanation of time requirements can be obtained at the IRS website)
Common Exemptions to FIRPTA
1.
Transferor furnishes Foreign Investor Certificate stating an exemption, signed under penalty of perjury. Actual knowledge, by any party to the
transaction, that the affidavit is false can subject that party to prosecution and financial liability.
2.
Transferor receives a “Qualifying Statement” (often referred to as an exemption or withholding certificate) stating that no taxes are owed or
stating the amount of taxes owed, which must be paid at the closing. This must come from the IRS.
3.
The property is being sold for less than $300,000 AND the Buyer or a member of the buyer’s family intends to occupy the property for at
least ½ of the first 2 years during which the property is occupied.
http://www.irs.gov/instructions/iw7/ar01.html
http://www.irs.gov/pub/irs-pdf/fw7.pdf
This information is provided as a courtesy and for informational purposes only. The information is deemed reliable but not guaranteed.
S a m p l e
What a Title Company Does
Requests a Title Report and Policy
Title Report- A report showing the condition of title before a sale or loan transaction. After completion of the transaction, a title insurance policy
is issued.
Policy- Title insurance is insurance against loss resulting from defects of title to a specifically described parcel of real property. Defects may run
to the fee (Chain of Title) or to encumbrances on the property.
Pays Off Existing Loans - The title company pays off existing loans when so ordered.
Taxes and Insurance The title company prorates the taxes and insurance upon instructions from the buyer and the seller.
Computes Interest on Loans
Signing of Documents - Assists the buyer and seller when signing documents.
Recording Documents -The title company records the appropriate documents with the county office, giving public notice.
Disbursement -The title company disburses the documents and monies to each party involved
What is Title Insurance?
It is a contract of indemnity which guarantees that the title is as reported and, if not reported and the owner is damaged,
the title policy covers the insured for their loss up to the amount of the policy. Title insurance assures owners that they are acquiring marketable
title. Title insurance is designed to eliminate risk or loss caused by defects in title from the past. Title insurance provides coverage only for
title problems which were already in existence at the time the policy was issued.
The Title Search
Title companies work to eliminate risks by performing a search of the public records or through the title company's own plant. The search consists
of public records, laws and court decisions pertaining to the property to determine the current recorded ownership, any recorded liens or
encumbrances or any other matters of record, which could affect the title to the property. When a title search is complete, the title company
issues a preliminary report detailing the current status of title.
The Preliminary Report
A preliminary report contains vital information which can affect the close of escrow: Ownership of the subject property; where the current
owners hold title; matters of record that specifically affect the subject property or the owners of the property; a legal description of the property
and an informational plat map.
Reviewing the Preliminary Title Report
. The preliminary report should be reviewed immediately with special attention to the following areas...
◊
Verify the ownership vesting. Make sure the names on the report are the same as the names on the purchase contract.
◊
Read the informational notes for important facts about the property.
◊
Carefully review the exceptions: bonds, deeds of trust, current taxes, CC&R's and easements.
◊
Look for surprises. If you can't locate an easement, if an unexpected deed of trust appears, etc., call your escrow officer right away. Let your
title company be the problem solver. Top notch escrow officers and title companies go out of their way to resolve problems quickly and accurately.
Escrow:
Very simply defined, an escrow is a deposit of funds, a deed or other instrument by one party for the delivery to another
party upon completion of a particular condition or event.
Whether you are the buyer, seller, lender or borrower, you want the assurance that no
funds or property will change
hands until ALL of the instructions in the transaction have been followed. The escrow holder has the obligation to safeguard
the funds and/or documents while they are in the possession of the escrow holder, and to disburse funds and/or
convey title only when all provisions of the escrow have been complied with.
The principals to the escrow : buyer, seller, lender,
borrower : cause escrow instructions, to be
created, signed and delivered to the escrow officer. If a broker is involved, he will normally provide the escrow officer with
the information necessary for the preparation of your escrow instructions and documents.
The escrow officer will process the escrow, in accordance with the escrow instructions, and when all conditions required
in the escrow can be met or achieved, the escrow will be "closed." Each escrow, although following a similar pattern, will
be different in some respects, as it deals with your property and the transaction at hand.
The duties of an escrow holder include; following the instructions given by the principals and parties to the transaction in a
timely manner; handling the funds and/or documents in accordance with the instruction; paying all bills as authorized;
responding to authorized requests from the principals; closing the escrow only when all terms are in accordance with
instructions.
IMPORTANT “GOOD FUNDS” REQUIREMENTS
This notice contains IMPORTANT information that may be CRITICAL to your closing. Please read and follow to the letter.
Arizona is a “Good Funds” State. This means no funds may be disbursed from an escrow account until those funds are
physically available for withdrawal
in the escrow agent’s Trust Account. All Customer deposits and Lender’s loan
proceeds checks will need to clear the payor’s bank prior to closing. BECAUSE PERSONAL CHECKS ARE
DIFFICULT TO VERIFY, AS PAID BY THE ISSUING BANK, ALL PARTIES ARE ADVISED THAT
PERSONAL CHECKS WILL NOT BE ACCEPTED FOR ANY DEPOSITS INTO ESCROW EXCEPT AS
INITIAL EARNEST DEPOSIT. BEFORE THE CLOSE OF ESCROW OR ANY REFUND OF THE
DEPOSITED AMOUNT, ALL CHECK DEPOSITS PLACED INTO ESCROW, INCLUDING CASHIER’S
CHECKS AND OFFICIAL CHECKS, MUST BE VERIFIED PAID BY THE ISSUING BANK BEFORE THEY
ARE CONSIDERED GOOD FUNDS. THIS MAY REQUIRE YOU TO PROVIDE A COPY OF THE PAID
INSTRUMENT.
Below are
minimum guidelines for determining availability of Good Funds. The timeframes indicated are business days
after the funds have been
deposited into our bank, NOT AFTER RECEIPT BY THE ESCROW OFFICER!
MONEY ORDERS, TRAVELER’S CHECKS, DRAFTS, FOREIGN BANK CHECKS, THIRD PARTY CHECKS
AND CASH ARE NEVER ACCEPTABLE FORMS OF DEPOSIT.
WIRED FUNDS ARE BEST TO AVOID A DELAY IN YOUR CLOSINGS.
Available the of Day of Bank Deposit
Electronic Transfer/Wired Funds
(Required For
same day Loan & Closing Funds)
Equity Title Agency Checks
Available One Day
After Bank Deposit
Cashier’s, Certified and Teller’s checks
from federally insured banks only**
**(Must be verified by the Customer’s Bank
prior to COE)
Available 3 Days
After Bank Deposit
Local Personal Checks**
Credit Union Checks (Local)**
Corporate Checks (Local)**
Official Checks (Local)
Available 7 Days
After Bank Deposit
All
Non-Local checks**
Non FDIC Insured Checks**
** Earnest deposits only. No personal
checks are accepted as additional deposit
COMMUNITY
PROPERTY
JOINT TENANCY
WITH RIGHT OF
SURVIVORSHIP
COMMUNITY
PROPERTY
WITH RIGHT OF
SURVIVORSHIP
TENANCY IN
COMMON
Parties need not be
married; may be more than two
joint tenants
Requires a valid marriage
between two persons
Parties need not be married;
may be more than two tenants
in
common
Each joint tenant holds an
equal and undivided interest in
the estate (unity of interest)
Each tenant in common holds
an
undivided fractional interest in
the estate. Can be disproportionate,
e.g., 20% and 80%;
Each spouse holds an undivided
one-half interest in the
estate
Requires a valid
marriage between two
persons
Each spouse holds an undivided
one-half interest in the
estate
One spouse cannot partition the
property by selling his or her
interest
Both halves of the community
property are entitled to a
“stepped up” tax basis as of the
date of death
Upon death the estate of the
decedent must be “cleared”
through probate,
affidavit or adjudication
Each spouse can devise (will)
one-half of the community
property
Requires signatures of both
spouses to convey or encumber
One joint tenant can
partition the property by selling
his or her joint interest
Deceased tenant’s share is
entitled to a “stepped up” tax
basis as of the date of death
No court action required to
“clear” title upon the death of
joint tenant(s)
Estate passes to surviving joint
tenants outside of probate
Requires signatures of all joint
tenants to convey or encumber
the whole
One spouse cannot
partition the property by selling
his or her interest
Both halves of the community
property are entitled to a
“stepped up” tax
No court action required to
“clear” title upon the first death
Estate passes to the surviving
spouse outside of probate
Requires signatures of both to
convey or encumber
Each tenant’s share can be
conveyed, mortgaged or devised
to a third party
Each share has its own tax
basis
Upon death the estate of the
decedent must be “cleared”
through probate, affidavit or
adjudication
Upon death the tenant’s proportionate
share passes to his
or hers by will or intestacy
Requires signatures of all tenants
to convey or encumber the
whole
Note
: Arizona is a community property state. Property acquired by a husband and wife is presumed to be community property unless legally
specified otherwise. Title may be held as “Sole and Separate.” If a married person acquires title as sole and separate, his or her spouse must
execute a disclaimer deed to avoid the presumption of community property. Parties may choose to hold title in the name of an entity, e.g., a
corporation; a limited liability company; a partnership (general or limited), or a trust. Each method of taking title has certain significant legal
and tax consequences; therefore, you are encouraged to obtain advice from an attorney or other qualified professional.
Ways to Take Title in Arizona
