The primary way to avoid the withholding is the “PERSONAL USE” exception. This will work ONLY if BOTH of the following tests are met:

1. The selling price is NOT MORE than $300,000.00, AND
2. The BUYER plans to use the property for PERSONAL purposes for more than one-half the time the property is in use during each of the two years following the closing.

TIP! The buyer DOES NOT have to be buying the property as a primary residence!
TIP! Vacancy days DON’T COUNT. So if the buyer plans to use the property for vacations for 3 weeks per year, and plans to rent it out 2 weeks per year, then this will result in 3/5ths personal use, and since this is more than one-half, the 2nd part of the test is met.

Now, suppose the price is more than $300,000.00, and the seller won’t close because he doesn’t like the 10% withholding ---

TIP! There is a special provision in the IRS Regulations that very few people know about --- even attorneys!! It is called the “substantial presence test.” If a seller can pass this test for any tax year, he can elect to be treated as a US Citizen for that tax year, and if so, he has NO WITHHOLDING! The test requires that he is physically in the U.S. for at least 183 days during the year ---- but here’s where it gets interesting! He can count all of the days he is here this year, and 1/3 of the days he was here last year, and 1/6 of the days he was here two years ago ---- ALL as if it was THIS YEAR. Example: 2007 – 150 days, and 2006 – 90 days, and 2005, 36 days. ----- We count the entire 150, and 1/3 of the 90 (being 30), and 1/6 of the 36 (being 6), and that gives us a total of 186 days for the year 2007!!!! --- So this seller would qualify to be treated as a US Citizen for 2007 tax purposes! NOTE OF CAUTION: The seller would then be legally obligated to file a Form 1040 at year end and pay tax on worldwide income like all other US Citizens --- BUT --- he would also be entitled to CREDIT for any FOREIGN taxes paid, and in many cases, this wipes out the entire U.S. tax!

In the event nothing else works, and withholding is going to be required, it is critical that you advise your seller to discuss an EXEMPTION APPLICATION with his accountant. The IRS exemption form is known as “8288-B,” and if the seller files this PRIOR to closing, he can demonstrate to IRS that his maximum tax on the sale is less than the 10%. The IRS will then allow the CLOSING AGENT to temporarily hold the 10% in escrow until IRS responds, and then the closing agent can send the REDUCED withholding to the IRS, with the balance to the seller. The reduction often brings the withholding down to ZERO, so that the seller can end up with the whole thing. If needed, then the sooner this is filed, the better, because it will cut down the seller’s waiting time after closing.

TRANS-STATE TITLE INSURANCE AGENCY, LLC
3050 Aventura Blvd. Suite #300 Aventura, FL 33180
Tel. (305) 931-5000 - Fax (305) 932-7838

Editor's Note: While this article was written by Gary Bodzin, an Attorney licensed to practice in the State of Florida, this article should not be relied upon for specific legal advice. This article is intended for educational purposes only, in order that you may better understand the options available to you and your customers. As each real estate transaction or legal matter is different and every buyer’s or seller's immigration and taxation status is unique, you should advise your customers to seek the advice of competent legal counsel, versed in the applicable state and federal laws. Should your customer choose to use Gary Bodzin or Marty Bodzin, please have them contact either of them directly through Trans-State Title Insurance Agency LLC.