FIRPTA, Documentary Stamp Tax, and a Mortgage
If you are transferring real estate in Florida you may trigger The Foreign Investment in Real Property Tax Act of 1980 (“FIRPTA”) and Florida Documentary Stamp Tax (“Doc Stamp”)even if cash isn’t exchanged. The amount of each tax is calculated based on a percentage of either the “Amount Realized” or the “Consideration” as is explained below.
In the FIRPTA context, the “Amount Realized” includes, but is not limited to, “the amount of any liability assumed by the transferee or to which the property is subject immediately before and after the transfer.” IRS Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities (2016).
In the Doc Stamp context, “Consideration” includes, but is not limited to, “the amount of any mortgage, purchase money mortgage lien, or mortgage other encumbrance, whether or not the underlying indebtedness is assumed.” Fla. Stat. §201.02(1)(a) (2016). The definition of “Consideration” in the Doc Stamp context clearly indicates that the tax is due if a mortgage encumbers a property when it is transferred.
But what if the mortgaged property is exchanged from an individual to a wholly owned LLC and no additional money is transferred between the parties? Is there an exception in this factual scenario?
The answer is no. Florida Courts have confirmed that documentary stamp tax is due in this exact factual scenario. See Dept. of Revenue v. Pinellas VP, LLC, 3 So. 3d 361 (Fla.2d DCA 2009)(holding that documentary stamps were owed when there was a mortgage on the property despite grantor company and grantee company being wholly-owned by the same person); see also Dept. of Revenue v. PMR Resorts, 868 So.2d 621 (Fla. 2d DCA 2004) (holding that documentary stamps were owed when there was a mortgage on the property despite grantor individuals wholly owning grantee company).
As indicated above, the definition of “Amount Realized” in the FIRPTA context is nearly identical to “Consideration” in the Doc Stamp context. Consequently, it is possible (indeed, likely) that the IRS will determine that FIRPTA withholding is required to a transfer from a foreign individual to a wholly owned LLC if a mortgage encumbers the property at the time of the transfer even if no additional money is exchanged. Consequently, to avoid any IRS penalties, a withholding certificate should be applied for prior to the transfer to clarify the extent of FIRPTA withholding (if any) that would be required.
Barbosa Legal is a boutique international law firm located on the historic Lincoln Road in the heart of Miami Beach, Florida. The primary focus of the firm is to aid international citizens that desire to invest in the United States, specifically navigating the complexities of the United States tax codes and how they interact with international laws.
The Barbosa Legal team has ample experience negotiating, drafting, and enforcing all transaction documents and agreement. They assist with planning for future tax implications, creating enforceable transaction contracts, explaining economic conditions and currencies, and the ability to register businesses in multiple countries.
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