Foreign Investment in Real Property Tax Act

By: Clark, Campbell, Lancaster & Munson, P.A.

Q: I am interested in purchasing property owned by a foreign person.  What do I need to know?

A: During the past few years, there has been an influx of foreign investors from Canada, Europe, and South America purchasing property in Florida.  While purchasing property in Florida can be a wise investment for a foreign person, anybody buying property from a foreign person should proceed with caution.

The Foreign Investment in Real Property Tax Act (FIRPTA) was enacted by Congress in 1980 to require foreign persons pay taxes on gains when selling property located in the United States.

Under FIRPTA, the buyer, and not the foreign seller, is required to withhold a certain percentage of the purchase price at closing and remit that amount to the Internal Revenue Service shortly after the closing.  In most closings, the buyer usually enlists the services of the attorney handling the closing to handle the withholding and remit the withholding along with certain required forms directly to the IRS on behalf of the buyer.

FIRPTA does not apply to a resident alien if the resident alien meets what is known as the “Green Card Test,” which, as the name implies, requires the foreign person possess a Green Card, or the “Substantial Presence Test,” which requires determining how long the foreign person has been present in the U.S. over a certain period of time prior to the closing.

A foreign person includes a nonresident alien, foreign corporation, foreign partnership, foreign trust, foreign estate, and any other person that is not a U.S. person.

Recently some changes have been made to FIRPTA, and effective February 16, 2016, in some cases, the standard 10% withholding amount has been increased to 15%.

Most types of U.S. income received by a foreign person are subject to a federal tax of 30%, but a reduced rate or exemption may apply if there is a tax treaty between the foreign person’s country of residence and the U.S.  If the amount withheld exceeds the amount eventually due from the foreign person, the foreign person may obtain a refund from the IRS.

In some cases, if the buyer intends to use the property as the buyer’s personal residence, no withholding is necessary.  However, a buyer should beware of any foreign seller who is pressuring the buyer to claim the personal residence exception in order to avoid withholding if that is simply not true.  Under FIRPTA, the buyer’s liability can be up to the amount of tax to be withheld plus interest.  Furthermore, if the buyer willfully fails to withhold or notify the IRS, the buyer commits a felony and could face imprisonment up to five years and a $10,000 fine.
If you plan to purchase property owned by a foreign person, make sure the attorney handling the closing is familiar with FIRPTA, asks all of the right questions, and handles the withholding aspect if necessary.

The April 7th edition of “The Law” will discuss how courts are handling foreclosures when banks lose the original mortgage documents.

Overtime Law

By: Dan Rich
Clark, Campbell, Lancaster & Munson, P.A.

Q: What impact will proposed federal overtime changes have on me?

 A: In the summer of 2015, the Department of Labor proposed and began taking comments on widespread changes to federal overtime laws. The Department of Labor has until July of this year to issue a final rule. The proposed rule would raise the income level at which employees can automatically qualify for overtime eligibility and marks the first time the government has drastically addressed this issue since 1975.

Currently, employees who automatically qualify for overtime pay are those earning $23,660 or less and any others who do not fall within the so-called “white-collar exemption.” The white-collar exemption provides that salaried workers who fall above the current limit are entitled to overtime pay only if they are not classified as administrators, executives, or professionals. Statistically, the current $23,660 overtime limit figure covers less than 8% of full-time salaried employees and falls below the poverty level for a family of four.

The new rule would mandate that all salaried employees, regardless of title or duties, are eligible for overtime if they earn $50,440 or less. The Department of Labor estimates that approximately 4.6 million employees who are currently exempt would receive overtime protection under the new law. The Obama administration proclaims that the new limit is necessary in order to compete with inflation, which has increased while the overtime threshold has remained the same.

Opponents of the law say that it will lead employers to, among other things, reclassify salaried workers as hourly employees or cut employee wages and bonuses or reduce hours to avoid paying overtime. But the biggest criticism is that the new overtime law will hurt small and mid-sized business who will struggle to absorb the increased labor costs.

Proponents of the change say that raising the salary threshold will help give employees more power and flexibility over their labor and fairer compensation for their increased productivity. Supporters also allege that the proposed overtime threshold change will increase employment, not decrease it, because employers are likely to add jobs or spread hours to underemployed workers to avoid paying overtime wages.

Putting both arguments aside, one thing is clear: raising the overtime threshold for automatic coverage would mean that earning overtime would no longer be contingent on what kind of work or the label your boss gives you. Regardless of title or duties, all employees earning a salary of $50,440 or less would potentially now be entitled to overtime compensation.

The March 24th edition of “The Law” will discuss potential pitfalls of buying property from foreign persons.

 Dan Rich is an associate attorney with the law firm Clark, Campbell, Lancaster & Munson, P.A. Questions can be submitted online to thelaw@clarkcampbell-law.com