5 Legal Myths About International Real Estate — BUSTED
Real estate professionals should have a basic knowledge of the global issues impacting foreign investors and buyers of U.S. real estate.
When it comes to working with foreign buyers and sellers, there are several issues that I see over and over in my legal practice. From how title is taken to understanding the Foreign Investment in Real Estate Property Tax Act (FIRPTA), misunderstanding these issues can cause lost transactions and severe implications for the global buyer, seller or investor.
I had a case not long ago where the seller was in Russia. We were under contract moving along nicely toward closing. The buyers were ready to move in, and in preparation for closing, the seller made an appointment at the U.S. Embassy in Russia to have his closing documents notarized.
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Unfortunately, because of COVID-19 restrictions, the embassy would not allow the seller’s witness to come in with the seller, and the embassy employees were not permitted to serve as a witness. We were at a standstill.
It ended up delaying the closing, as there is no exception to the state law requiring two witnesses to execute a deed. Fortunately, the buyer was flexible, so once the embassy rules relaxed and the witness was able to attend, we were able to proceed to closing.
Often, the parties to the transaction and the agents are surprised to learn of this rule and ask me what the alternative is; and they are not happy when I advise there isn’t one.
In another case, the seller was foreign and saw an estate planning attorney shortly after purchasing the property. He created a trust, but never executed and recorded a quitclaim deed to transfer the property from his name into the trust. He died in Morocco. Now, the probate process is taking a long time, and the family cannot close on a sale and access the money from the sale of the property because they are required to complete the probate process in order to have the authority to sign the closing documents on behalf of the deceased owner.
Unfortunately, issues like this frequently arise when working with foreign buyers or foreign sellers of U.S. properties.
While it’s always smart to involve an attorney and tax professional in your transactions with global buyers and sellers, there are some issues about which you should have a basic understanding. Here are the most common misconceptions that I see:
Myth #1: If my foreign sellers have a Green Card or an individual tax identification number (ITIN), or own the property in a Florida Limited Liability Company (LLC), then FIRPTA doesn’t apply.
Facts: FIRPTA is a federal income tax issue. In layman’s terms, it is a withholding of 15% of the gross sale price of a property owned by a non-U.S. tax resident to ensure that they pay the capital gains tax on the sale of the property. A nonresident for tax purposes is separate from a person’s immigration status. I hear from real estate agents who say, “Oh, my seller has a Green Card,” or “My seller has an ITIN.” Those are not the litmus tests that we should be relying on.
The general rule is, if the seller is a foreign person, including an LLC, even if it’s a Florida LLC owned solely by a foreigner for the sole purpose of holding the property, FIRPTA is still going to apply because the taxpayer who owns the company is foreign. So, having a U.S. LLC does not let your buyer off the hook.
In the recent revision of the Florida Realtors/Florida Bar Contract for Sale and Purchase, the FIRPTA addendum to the contract has been removed, and the information is instead in the standard provisions of the contract. As a result, it gets overlooked because it is easy to miss and does not have any blank lines to complete. When it was a separate addendum, it seemed to receive more attention, and the closing agent would have more notice to inquire and obtain the necessary information.
Myth #2: My foreign buyer should always register as a Florida LLC to buy property in the United States.
Facts: An LLC isn’t always the answer. Sometimes you hear people say, “Just put the property in an LLC or a trust to avoid tax issues.” But it depends what country the person you’re working with is from as to whether that option is a good idea.
For example, I would never put a Canadian homebuyer in an LLC, but I’m happy to use an LLC for a British homebuyer. The tax ramifications for a Canadian on their Canadian tax return are not favorable if the U.S. property is in an LLC. So, for a Canadian I may recommend a partnership. I always recommend getting a U.S. certified public accountant who can work with the buyer’s accountant from their home country. We also use cross-border professionals who look at the tax treaties in both countries to ensure the strategy we employ does not come with any unintended negative consequences in the future.
Myth #3: My foreign buyer should have his entire family on the title in case one person dies.
Facts: Global buyers should be thoughtful about who is on the title. People think they are doing themselves justice with estate planning and want to put multiple generations on the property. Remember, the global buyer eventually turns into a seller. So, if you add mom, dad, sister and brother (above the age of 18) to the title, all those people are going to be sellers subject to FIRPTA when the property is sold. It is also important to be mindful of where the buyer is coming from because in many countries around the world this is a sound method of ownership; so they may just advise of their intention to proceed this way without asking if this is beneficial in the U.S. as well. Additionally, many countries allow minor children to be on title, which is not permitted here. So, to avoid any issues, it is best to discuss prior to closing.
I’ve had cases where the foreign owner dies and the family owes U.S. estate tax on the value of the property, even if they don’t sell it. A trust attorney can help set up ownership and title that works best for the property buyers.
Myth #4: It doesn’t matter how the property will be used when choosing who to put on the title.
Facts: How your foreign buyer intends to use the property will drive how the property should be titled at closing. Will they rent the property? Do they plan to lock and leave–only using it for their own vacation and not renting to anyone? Is this an investment they are simply holding for appreciation? Are they buying so their child has a place to live while attending a Florida school then sell when they are finished? What happens if they die holding the property? The concern about liability for a rental is different than the concern about death and estate tax, but the answers may end up being the same in some circumstances, and how the foreign party takes title makes a huge impact on the outcome.
Culturally, some global buyers come with predetermined notions that holding title a certain way is better, stronger, safer. Don’t just take the person’s word and, for example, put the buyers and their son on the title. It may not be wrong, or it may cause a substantial burden in the future; and as a real estate professional, this is not a liability you should shoulder. It’s best to have the buyer seek a professional to help them determine the best way for them take title. Sometimes how the global buyer wants to do it is counter to what they’re trying to accomplish.
Myth #5: The CPA, Realtor® or another relative can have their name on an LLC used to hold title because they have a tax ID number.
Facts: Well, technically they can have their name on the title or LLC, but it’s not a good idea to put anyone’s name on legal documents other than the actual property owner. I see this frequently with Eastern Europeans because they (or their family) have seen their government at home simply seize a property and remain leery and distrustful of government. There is also a strong trust among fellow countryman so they may “square up” at home financially.
For example, I had a buyer that is Czech and who had a brother-in-law who is also Czech but living full time in the United States, so they put the brother-in-law’s name on the LLC, even though the real owner is a different person. Bad idea as now the brother-in-law can sell everything without the real owner’s approval. The closing agent would simply rely on the company documents that would reflect the brother-in-law as the authorized person to act on behalf of the company. The property could be sold, and the real buyer would have no idea; and the closing agent and real estate professionals would have done nothing wrong.
Working with foreign buyers and sellers can be rewarding, but it can also be fraught with misunderstandings and legal issues. It pays to have a basic knowledge of some of the more common issues. Even still, always refer your buyers and sellers to real estate attorneys and accountants to ensure the transaction goes off without a hitch and you avoid any unnecessary liability for something that is not your responsibility.#
Jo Ann Koontz is a Southwest Florida-based attorney and CPA practicing in the areas of real estate, business organizations and taxation.