It's a numbers game! There's just no way around it. According to the new IRS regulations, foreign persons must provide a social security, tax, or employer identification number in transactions involving the disposition of a United States real property interest (Property). This means that closers will no longer be able to rely on statements on IRS forms and certifications that such numbers had been "applied for." The new regulations will affect all closings after November 3, 2003, and will apply to the following types of settlement situations:

(1) when the seller is a foreign person or entity and either withholding is required under Foreign Investment Real Property Tax Act (FIRPTA) or the seller is claiming an exemption from withholding;
(2) when a foreign person applies to the IRS for a withholding certificate for use at settlement;
(3) simultaneous and deferred exchanges under IRS Section 1031 Tax Deferred Exchange; and (4) sales of personal residences with a claimed exclusion of gain pursuant to IRS Section 121.

For guidance in these situations, closers should refer to IRS Section 897 and Section 1445, the former of which imposes a tax on the disposition of a Property by foreign persons and the latter of which provides withholding procedures to collect the tax and facilitate the closing of a Property. Under these regulations, transferees must withhold and report ten percent (10%) of the amount realized by the foreign seller; however, transferees may avoid this requirement if the seller's withholding certificate from the IRS shows a different amount or if the seller provides the transferee and the closer with a certification establishing that the seller is either exempt or excluded from withholding. Any closers intending to withhold and report the tax should file Forms 8288 and 8288-A with the IRS within twenty (20) days after the actual closing.

Regarding sales of personal residence exclusions, individual non-resident alien sellers, can exclude the gain on the sale of their personal residences under Section 121 just as U.S. citizens can. The new regulations did not change Section 1445 (b)(5)'s exemption for property acquired by transferees to be used as their personal residence where the property value is $300,000 or less. Nevertheless, to avoid liability, closers should still require transferees to sign an affidavit stating that they intend to use the property as their personal residence. In addition, where the sale of property exceeds $300,000, the seller's notice of nonrecognition of gain based on Section 121 may not be relied upon and an IRS withholding certificate is required; the exclusion may reduce or even eliminate the amount to be withheld under Section 1445.

The new regulations require that the transferor's social security, tax, or employer identification number be shown on all forms, exemption certifications or applications for withholding certificates for any closings occurring after November 3, 2003. If the number is not included on the withholding tax return form, then the seller will not qualify for a credit or refund and penalties could even be imposed on the transferee or the closer. Most importantly, the IRS will deny applications for withholding certificates that do not include the seller's tax identifications number, which would cause unwanted closing delays. Additionally, foreign transferees (where the purchaser is also a foreign person) must also provide a tax identification number by the time the returns are filed or they could be subject to penalties.

Closers should be mindful and the specific ways in which the new regulations address claimed exemptions from withholding. Although previous regulations permitted the seller to claim exemptions from withholding by providing a non-foreign status certification to the transferee and closer (and allowed the latter to rely on such certificates), the new regulations disregard certain record owners as the owner for tax and reporting purposes, a reality that will make the certificates less useful overall. Since September 4, 2003, some "disregarded entities," such as single member LLCs (the member is treated as the transferor), qualified REIT subsidiaries, and qualified Subchapter S subsidiaries, have been treated as the transferor instead of the seller of a Property even though such entities may have been the record owners. Also, a domestic entity must state that it is not a disregarded entity on its non-foreign status certification; otherwise the closing will be postponed until the IRS issues a withholding certificate to the owner of such entity. Sample certifications are contained in the new regulations.

Closers must also understand how the new regulations impinge on foreign sellers engaged in Section 1031 exchanges. If the seller is a foreign person, simultaneous exchanges that do not involve the receipt of money or other property will be exempt from withholding. Deferred exchanges cannot be exempted because the effect of the seller's failure to recognize the gain depends upon whether the deferred exchange was successfully completed. As for non-simultaneous exchanges, a foreign seller must provide an IRS withholding certificate.

Finally, for withholding purposes, written communications must now be addressed to: The Director, Philadelphia Service Center, P.O. Box 21086, Drop Point 8731, FIRPTA Unit, Philadelphia, PA 19114-0586.