Page 9 - Foreign Investor Guide - Hawaii

What is a notice of non-recognition?
A notice of non-recognition is a written How does withholding affect a seller’s
notice given by the seller to the buyer stating 1031 exchange?
that no recognition of any gain or loss on A seller in a 1031 exchange may use
the transfer is required because of a non- proceeds only to pay necessary expenses
recognition provision in the Internal Revenue of sale or for the purchase of replacement
Code – e.g. IRS section 1031 – or a provision property. Amounts expended for other
in a U.S. tax treaty. The buyer is required to items will be taxable. Thus, it is important
file a copy of the notice with the IRS by the for foreign sellers to recognize that using
20th day after the date of transfer. The notice proceeds to pay the FIRPTA has a taxable
must contain the seller’s TIN. There is no consequence because FIRPTA is not
promulgated form for this notice. considered a necessary expense of sale.
To avoid this result, sellers should bring
A buyer is personally liable under FIRPTA if in cash to the closing agent to pay for
there is ultimately any actual tax liability to the FIRPTA withholding, thus allowing
the seller resulting from the sale. The IRS can all proceeds generated by the sale to
assess the full 15 percent of the sales price be used in the exchange.
that should have been withheld or the seller’s
actual tax liability on the sale, whichever is Choose Old Republic Exchange to handle
less, plus interest and penalties. Thus, a buyer your next exchange. We have offices
should never close a sale in reliance on a nationwide to serve you and/or your
notice of non-recognition transaction except client’s exchange needs.
on the advice of a CPA, attorney, or other tax
advisor because personal liability can result
from reliance on an improper notice of non-
recognition.

What if the seller applies for a Withholding
Certificate toexcuse withholding and the
application is still pending at the time of
the disposition?
If an application for a Withholding Certificate
is submitted to the IRS on or before the
date of a transfer and the application is
still pending on the date of transfer, the
withholding tax must be withheld, but it does
not have to be paid and reported until
20 days after the withholding certificate or
notice of denial is mailed by the IRS. It is
important to note that if the seller’s principal
purpose in applying for a withholding
certificate is to delay paying the withholding,
the buyer/transferee will be subject to
interest and penalties.