Page 9 - Foreign Investor Guide - Hawaii

What is a notice of non-recognition?
A notice of non-recognition is a written notice How does withholding affect a seller’s
given by the seller to the buyer stating that no 1031 exchange?
recognition of any gain or loss on the transfer A seller in a 1031 exchange may use
is required because of a non-recognition proceeds only to pay necessary expenses
provision in the Internal Revenue Code – e.g. of sale or for the purchase of replacement
IRS section 1031 – or a provision in a U.S. tax property. Amounts expended for other
treaty. The buyer is required to file a copy of items will be taxable. Thus, it is important
the notice with the IRS by the 20th day after for foreign sellers to recognize that using
the date of transfer. The notice must contain proceeds to pay the FIRPTA has a taxable
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
A buyer is personally liable under FIRPTA if bring in cash to the closing agent to
there is ultimately any actual tax liability to pay for the FIRPTA withholding, thus
the seller resulting from the sale. The IRS can allowing all proceeds generated by
assess the full 15 percent of the sales price the sale to 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.