Matthew Maschler:
Welcome to the Real Estate Finder podcast. I’m Matthew Maschler, real estate broker with Signature Real Estate Finder, and with me the co-host of the Real Estate Finder podcast,
Staci Garcia:
Stacey Garcia.
Matthew Maschler:
Hi, Stacey. How are you?
Staci Garcia:
I’m alive.
Matthew Maschler:
That’s good to know. That’s good to know. Stacy, have you ever heard the word ferta?
Staci Garcia:
Yep.
Matthew Maschler:
Do you know what it means?
Staci Garcia:
Foreign investor property,
Matthew Maschler:
Foreign investor, real property tax act?
Staci Garcia:
Yeah. Okay.
Matthew Maschler:
Yeah. So ferta is sounds funny. It sounds like a funny word, it sounds like a burp, but it’s important for real estate agents to know, and it comes into play when you’re dealing with foreign nationals who are selling their property. And so what I try to tell my agents and what all agents should know is when you’re on your listing appointment, if you find out that your seller is a foreign national, you should ask them if they’re aware of their ferta obligations. And most of the time they’ll say yes, and that they have an accountant that they deal with that handles it, and that’s okay. But sometimes they don’t know or sometimes they know the wrong thing. So I like to tell stories.
I’m at that age, I just turned 50, so I’m at that age. I tell stories about when I was a kid, a TV show or a movie, or a song, or a lesson I learned from media or from my career in real estate. And that’s why I started this podcast. So the first time I encountered Ferta, I was representing a seller in the Oaks of Boca Raton, and they were Canadian. So when you think of foreigners, you don’t always think of Canadians, but to all my real estate agents out there, if you have Canadian sellers, think Ferta. So I wasn’t aware of all the Ferta rules, and I asked him, I knew enough to ask if he had an accountant to handle the sale, and he said yes, but this was during the market crash in 2010, 11. So the seller lost money on the property, right?
They’re selling the property for less than they bought, so there’s no taxes because they lost money. So they didn’t think they were going to have to deal with any of that. We get to the closing, and the title company wants to charge the seller of 15% withholding for Ferta. So first thing we have to say is that it’s a withholding. It is not a tax. The i r s doesn’t tax sellers 15% of the purchase price, the gross purchase price, but it’s a withholding of the purchase price. So 15% of the total sales price gets withheld by the title company and submitted to the I R S. It’s incumbent upon the seller to file a tax return and ask for a refund. So just like at work, you get a salary and you your boss, us escrow’s money, withholds money. When you do your tax return, you can either owe money to the I R S or get a refund from the I R Ss.
And if you’re a real estate agent, nobody’s withholding any money, you get your big ginormous real estate commission checks. But come tax day, you have to pay a very large percentage in taxes. There was no withholding. The I R S trusts real estate agents because we’re licensed by the state. We live in the country, and the I r s knows that they can go after us for any unpaid taxes. So if I made $400,000 in commissions, but I have expenses advertising, et cetera of 300,000, so I made a hundred thousand dollars of income, and I owe the I R S on my income. If I don’t pay it, the I R S knows that they can come after me, they can audit me, and they can even imprison me if I don’t pay those taxes. Whereas if the seller is a foreigner, if they’re Canadian or English or South African or Chinese or Venezuelan and they owe taxes, there’s nothing the I R S can do to go after that person in their home country if they have no other contacts with the us, don’t own any other property in the us, never come back to the us.
The I R s is powerless to collect taxes owed, and that’s why they created this rule that requires, and it’s interesting. Do you know who’s required to pay the ferta? The buyer. The buyer, right? Because the I r s knows that if the seller’s gone, they can’t go after the seller. So it’s a buyer’s obligation to make sure that that money is collected at the closing. And if it’s not, the buyer is liable because the I R s knows it’s much easier to go after the buyer who owns real property here and who’s more likely to be a citizen or a resident here. So that’s why the title company won’t mess around and just let the seller say, Hey, it’s okay. I don’t know any taxes. I bought the house for a million, I sold it for 800,000. I lost 200,000. There’s not going to be any taxes due even if you withhold 50% of a million $150,000, I’m just going to get it back anyway when I do my tax return. So you don’t have to withhold it? No, you have to withhold it and the closing agent will catch it, and it’s incumbent on the buyer to make sure that that is paid so it will get collected. There are exceptions to the rule.
If it’s under 300 and the buyer intends to live in the property, then the crypto withholdings don’t have to be collected, but the buyer has to sign in writing that they’re going to live there. And most of the time there’s no requirement in the contract that the buyer participates. So if you’re going to employ that exception, you got to make sure you do that when you get your contract signed because otherwise the buyer may not sign it out of the goodness of their heart at the closing table.
Staci Garcia:
What if a foreign national buys a property here that was owned by a foreign national?
Matthew Maschler:
Well, once the buyer has the property, the i r S has jurisdiction on the property, they can file a lien on the property, right? If it wasn’t collected, the i r S can file a lien and now when that seller sells it, they’re going to sell it the gross price, right? If it’s subject to ferta, the gross purchase price, 50% will be withheld by the title company. It might be less if it’s under a million dollars, we’re going to call Greg Geffen later to find out when it’s less than 15%.
But yeah, so when that buyer becomes the seller, 15% will be withheld under ferta. And if there is an i r S tax lien, that will be against the property, and that presumably means there won’t be enough money to pay and they won’t be able to close. So the takeaway for real estate agents that are listening to this is when you’re on your listing appointment, the seller, if they’re foreign, make sure they know about ferta rules. And if not, put them in touch with an accountant. I have a few accountants that I can recommend or the closing attorney, and make sure you do it early in the process. One, because you don’t want the seller to be surprised later. And two, sometimes to get exemptions or certifications, it could take time. So you don’t want to wait until you get an offer, or God forbid wait until the closing to first start. You want to start the day, you get that listing agreement signed or the day it’s listed, get your ducks in a row on the ferta.
Staci Garcia:
Is it a law that they have to write on the listing that the owner is a foreign national?
Matthew Maschler:
No. No. And there’s something in the contract that there’s standard language in the contract that says if the seller is a foreign national, they will be subject to Ferp tax. So it is buried the contract, but it’s also the law. So sellers, it’s very difficult to get around this. So I’m going to call Greg, Greg Geffen. We were talking late last night about I the Ferta, and he wanted to be on the show, but he had a closing this morning. So we’re going to call him in his office.
Speaker 3:
Your call has been forwarded to an automatic,
Matthew Maschler:
Alright, I’m going to text him to tell him to call in. And in the meantime I’m going to tell you a story of why this came up.
Staci Garcia:
Okay?
Matthew Maschler:
So went on a listing appointment on a nice house in Seven Bridges, and the seller is in a different country. It’s an incredible story. They were here visiting friends. They come to Boca every year and they visit with friends and their friends bought a house in seven Bridges. So friends wanted to show it to them. So they went to the sales center and they looked at all the houses and looked at all the models, and these people decided to go ahead and buy a house, but they live overseas. They don’t live here. They only come for vacation. But when you’re in those models, so it’s
Staci Garcia:
Very intoxicating. It’s
Matthew Maschler:
Very intoxicating. So they bought a house and realized that
Staci Garcia:
They had buyer’s regret,
Matthew Maschler:
I think after the closing that they’re not going to spend as many days here as they think they will. So they rented it out
And now they’re thinking of selling, I’m on a listing appointment. And I say, okay, well you do realize that as a foreign seller you’re going to be subject to this 15% withholding. And they said, oh no, we don’t. I said, what do you mean? No, we don’t have to pay taxes in the us. I’m like, yes you do. Everyone has to pay taxes. They’re like, no, because of the way the bank was set up and all the money goes to this offshore bank, nothing touches the us. And I’m like, well, the property’s in the us
Staci Garcia:
Right? Okay, Gordon Gecko,
Matthew Maschler:
The property’s in the us,
Right? I asked, do you pay the property taxes? They said, yeah, yeah, we pay our property taxes. I go out of the farm bank, okay, you pay all the bills, H o a, everything out of the farm bank. Okay, but you said you had it rented. What about the tenants deposit? That’s in the farm bank too. So I don’t want to go there and say that tenants deposit has to be in the Florida Bank. Yikes. Right? But I said, listen, you’re going to have to deal with this at the closing. There’s going to be a 15% withholding of the total purchase price. So if you sell the property for $2 million, they’re going to hold $30,000 until you file a tax return. Oh, we can file a tax return. We don’t have a tax ID number. I’m like, well, you’ll get one when you go to file the tax return. So the listing didn’t go very well,
Staci Garcia:
Appointment
Matthew Maschler:
Didn’t go very
Staci Garcia:
Well.
Matthew Maschler:
They’re like, are you sure? I’m like, yeah, I’m sure. I mean, I wouldn’t be blowing my listing appointment if I wasn’t sure, right? I mean, can’t not tell you. And then you find out later at the closing that $30,000 is going to go to the, it’s 15% of, no, it’s not 30, it’s 300,000. Why is it 30 300,000, 15% of 2 million? It’s $300,000. So I can’t sit back and have you not know that $300,000 at the closing is going to beheld. There’s nothing you could do about it. It will be withheld and then, but it’s not a tax. You file a tax return and you can get that refunded because theoretically, I dunno, if you paid one five for the house and sold it for 2 million, you had a $500,000 gain minus whatever expenses, maybe you only have a $300,000 gain, 20% of 300,000 is 60 grand. You may only owe 60 grand in taxes. You file that tax return and you
Staci Garcia:
Get the rest back, you
Matthew Maschler:
Get the two 40 back. So it’s to your benefit to hire an accountant and do the tax return, it’s not going to cost you a lot of money, but you have $240,000 at stake. So I didn’t get the listing, and we’ll see what happens next. But it reminded me that I wanted to tell these two stories, the old story and the news story, and tell my agents out there that if you have a foreign seller, that 10 to 15% of the gross sales proceeds, most of the time, 15% will be sent to the I R S within 20 days of closing. And it’s the buyer’s responsibility. There’s exemptions if the property’s less than 300,000 and if the buyer’s going to live there, but the buyer’s going to have to cooperate with you on that. So you have to make
Staci Garcia:
Sure. So I have Canadians coming down December 4th to buy a property on the beach. Is there something that you have to tell your foreign national buyer?
Matthew Maschler:
You should let them know these rules. Listen, just so you know, these are the rules when it comes time to
Staci Garcia:
Sell,
Matthew Maschler:
These are the rules regarding taxes that you’re, they’re going to withhold a percentage of the sales price for you to ultimately pay your taxes when you sell. And like my original customer who bought the house for a million and sold it for 800,000, lost 200,000. It doesn’t matter if you made or lost money because you’re at the closing table. Nobody knows. The title company does know. The federal government doesn’t know i r s. No one knows what. If you have a gain or loss, all they know is you have a sale
Staci Garcia:
When
Matthew Maschler:
You file the tax return, that will show the gain or loss and then you’ll get your money back. And just because a foreign national has a tax ID or social security number, it doesn’t mean that they’re exempt from ferta. A lot of foreign nationals will have a tax ID number because if they’re renting out the property, they’re reporting that income hopefully. And other reasons why they may want to have a taxpayer ID number. You don’t have to be a US citizen to have a taxpayer ID number. It’s not a social security number. It doesn’t give you a citizenship just having a taxpayer ID number. Our taxes in the US are different than taxes in the rest of the world. I don’t know how it is in the rest of the world, but sometimes they tax you on your assets. So if this foreign national that I was dealing with has a different concept of different taxation concept than I do, but I can only go by the rules that we have, I’m going to try Greg again.
Speaker 3:
Your call has been forwarded.
Matthew Maschler:
Alright. So yeah, he was going to come in and give me a little bit more technical expertise on the FERTA rules on some of the exemptions or exceptions, right? Because technically it’s a 15%
Staci Garcia:
Who holds that money?
Matthew Maschler:
It’s given to the I R S. So the I R s holds it? That’s a good question. The closing agent has 20 days to give the money to the I R S. I’m going. So yesterday on Facebook, I put, I put, what’s it called? A note that said, Hey, I’m going to talk about Ferta tomorrow. Does anybody want to be on my podcast? And Greg responded, he sent me his YouTube. He did a great YouTube on Ferta. So if anyone’s out there and wants to hear more about it, check out on YouTube. It’s called ferta. What you need to know by the Geffen Weber Law Group. It’s pretty good. Alright, so besides Ferta, what else do we have to talk about?
Staci Garcia:
I am so fried right now that
Matthew Maschler:
Stacey’s been working. She’s
Staci Garcia:
Struggling. I’m thinking, if you’re not into real estate and you don’t want to be a real estate agent, what else is going on? What other opportunity can you work from home?
Matthew Maschler:
What else is going on in the world?
Staci Garcia:
You can make your own hours. Yeah,
Matthew Maschler:
You can sell soaps and candles on that seat. I
Staci Garcia:
Can’t, you know why? Because when I go into GreenWise and I go past that handmade soap section, I want to hurl. Yeah, I don’t care. I don’t talk
Matthew Maschler:
Made soap. I want factory meat soap.
Staci Garcia:
I don’t want to smell soap at all. So I have to avoid the section at the supermarket.
Matthew Maschler:
Yeah. So what else? Sometimes I come in with notes, but the only notes that came in today, what? The ferta notes. Oh, okay. So should we end the episode? We could end the
Staci Garcia:
Episode
Matthew Maschler:
Or
Staci Garcia:
We can add on with Greg later.
Matthew Maschler:
Okay. Alright. Well thanks for joining us on the Real Estate Finder podcast. And actually what I am going to do is I’m going to end the episode with the YouTube video for Ferta. What you need to know, I’m going to fast forward a little bit. Okay. I’m going to play
Speaker 5:
First the basics. What is Ferta? Simply stated, for many transactions involving a foreign seller, the Internal Revenue Code requires that 10 to 15% of the gross sales proceeds must be remitted to the I R S within 20 days of the
Staci Garcia:
Hi there, I’m Gregory Geffen. And I’m Benjamin Weaver, and we are de funded today. Well, this is very only to realize that the property’s not the right fit for them or that it didn’t appraise or perhaps the seller with a
Speaker 5:
In 20 days of the close.
Matthew Maschler:
There you go.
Speaker 5:
So the first thing to understand is that ferta is not a tax. It is merely a withholding. In this case, uncle Sam has decided they’re not in the business of chasing foreign nationals around the globe to collect the tax on any gains made on the sale of real property. Foreign seller will need to obtain a US tax ID number and apply for a refund by filing a return on the gain or loss on the property. Keep in mind that the ascertainment of the seller’s foreign status and submission of the withholding is technically the buyer’s responsibility and penalties for failure are often assessed against the buyer. As such, this task is sourced to us as the closing agent. What we’ll do in these instances is connect your client with a local C P A who specializes in working with foreign nationals to guide them through the process of filing the paperwork and getting a refund.
Here are a few misconceptions that people have. We are often asked after closing costs and commissions, my client is selling the property for less than what he paid for it a loss. Do we still need to comply with ferta? The answer is yes. Remember, ferta is not a tax. It is a withholding requirement. The fact that it may be obvious your client is taking a defacto loss on the property does not obviate with holdings. Even if this means your client has to come up with the cash at the table to cover the shortage in the case where they’re underwater because of a mortgage, the next misunderstanding we’ll often have is somebody will say, my client’s a non-US citizen, but he or she may already have a US tax ID or Social Security number. Does this mean that we don’t have to deal with ferta? No, not necessarily.
Many foreign sellers may already have a tax ID number for a myriad of reasons, but that alone doesn’t mean that we’re free to ignore ferta. They’re only exempt from withholding if they meet what is considered to be a US taxpayer as defined by the Internal Revenue Code and meet what is known as the substantial presence test and can execute what’s commonly referred to a seller’s non foreign certificate of closing. This is something to go over and be determined by local C P A with expertise in this area. Otherwise, and unless the transaction itself has exempt, which we’ll get to in a minute, withholding is required. Now let’s talk about the exemptions. The cases where the seller is a foreign national, but the transaction is exempt from withholding. This is the area that causes the most confusion transactions where the gross sales price is less than $300,000.
Most people in real estate are aware that many transactions that are less than $300,000 are exempt from crypto fund. But please understand a couple of things. First, the exemption is not automatic. A few criteria must be met. The I r S rules mandate that for the transaction to be exempt, the buyer must be purchasing the property as a home for their personal use and have definite plans to reside at the property for at least 50% of the number of days that property is used during each of the first two 12 month periods following the date of transfer. That last part, 50% of the number of days used is often confusing to buyers who often see the terms use and 50% and conflate this with the requirements of establishing residency in Florida and think that we’re talking about 181 days. That’s not the case as the I R Ss specifically advises that we do not count the number of days that the property will be vacant.
So basically that means that so long as the property is not investment property for rental or a flip, and the buyer’s going to use it for their personal use, it doesn’t matter if it’s a second home or they’re only going to use it few months a year, or even a few weeks a year. So the way this works is in order to recognize this exemption, we as a title company would need to obtain what’s called a residency certificate, where the buyer attests that the withholding is exempt as they have the intention to occupy the property within the parameters we just discussed. Now, here’s where this gets tricky, and this is very important in that there’s nothing in the contract that requires the buyer to sign the certificate form. If the buyer’s not comfortable or unsure, they can’t be forced to sign the exemption form once you’re in contract. And this has been dealt with in advance. So if you’re a foreign seller or if you have a foreign seller for a property that may qualify for the exemption and obtaining this exemption is important to them. This must be dealt with at the contractual level by adding language, the contract where the parties stipulate that the buyer is buying the property for their use and agrees to execute the required certifications. As always, feel free to touch base with us and we can provide this language to you.
Staci Garcia:
So with a little proactivity on the front end and the right advice, foreign sellers should not have to fear this ferta withholding or be taken surprise at the closing table. As always, please feel free to call us with any questions or to assist your clients. I’m Gregory Geffen. And I’m Benjamin Weber. And this has been what you need to know. We sure hope you would.
Matthew Maschler:
Alright, so thank you Ben and Greg. They have a great YouTube series called What You Need to Know, listening to Audio Only. I found the music to be distracting, but on my computer when I was just watching it on YouTube, it seemed to be fine. So hopefully we didn’t lose our entire audience. But we’re going to have Greg back on the show in a couple of weeks and we can talk about Ferta and I’m going to read to you what’s in the contract on Ferta. Seller shall inform buyer in writing if seller is a foreign person, buyer and seller shall comply with Verta, which may require seller to provide additional cash at closing. If seller is not a foreign person, seller can provide buyer at or prior to closing a certification of non-farm status.
So that’s an exception to Ferta. So there are certain foreign nationals that they do enough operations here in the US that the I R S has jurisdiction over them. So they’re accepted from ferta so they can have the certification of non-fat status and that gives the buyer the out that they don’t have to collect the ferta withholding. And then it says buyer and seller advised to seek legal counsel and tax advice regarding their respective rights obligations, reporting and withholding requirements. So actually we did have one situation like this in St. Andrew’s where it was our buyer and the seller was a foreign national with one of these certificates. So our buyer kind of freaked out, but we put him in touch with a lawyer who reviewed the certificate and saw that the seller was exempt from the withholding requirement and we were able to go ahead with the closing without that withholding.
Staci Garcia:
Awesome.
Matthew Maschler:
Awesome.
Staci Garcia:
Alright. You know what happened,
Matthew Maschler:
What?
Staci Garcia:
We both turned 50,
Matthew Maschler:
Turned 50 Sunday
Staci Garcia:
And I’m already 50. So now we’re on Flatlining
Matthew Maschler:
Flatlining and have, I usually have a piece of paper with a bunch of podcast topics
And I only brought up, I brought the ferta. Alright, well thank you for joining us on the Real Estate Finder podcast. I’m Matthew Ashler, real estate finder looking to help anyone. Usually it’s New Yorkers and people from New Jersey who are buying property, but if you are buying a property, if you are a foreign national buying property, I think the trick is there’s so much stuff here that this seller said to me. He’s like, well, why didn’t they tell me when I bought the property about this? And I was like, well, who’s they? And there’s no that would tell you, there’s a lot of things you have to know. Like the salesman who sold you the house, he wasn’t thinking of your tax consequences. No one’s advised of their tax consequences when they buy a house.
Staci Garcia:
You think that that would be the first thing. If he already set up an offshore account and he already knows that he doesn’t have to pay taxes, then I think he probably already researched on his own and decided to choose and pick what he felt like paying attention to.
Matthew Maschler:
Maybe, maybe. But also, was there foreign advisors that were advising them? Not US advisors, but the salesman here isn’t going to tell you your tax consequences. The closing agent’s not going to tell you, Hey, remember when you sell, it doesn’t happen. So to all my agents or to any agents out there, just a reminder, when you go in your listing appointment, if the seller is not a US person, make sure they know the ferta requirements. Contact Greg or contact me and come listen to my podcast and get the properties sold. Thanks for joining us on the Real Estate Fund podcast. I’m Matthew Ashler.
The future looks bright and the storms pass by the sky’s dark blue. When it’s almost that time, light shows cameras flash when I pass living in the moment, forget about the past. They save the best for last. Matthew Mania. We about to make a splash. Life is a marathon full of sharp turns, got to keep pace while the hands on the clock turns high. Five star. I run a show. You can tell the place electricity energy. If I, I’m always on time. Even if I’m making, I make dreams come true. Living my life. Hope the same for you. My sights got a real clear view. If you don’t know the time, I give you a clue. What knows. You know what you know knows. It’s, it’s knows it’s it. What time? Whose time, what time? You know, got shook, scared. Can’t look. We’re not afraid of big bad wolf.
