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  • Daniel Gray CPA US Tax Services Toronto Canada

Don’t try to fool IRS on FIRPTA sale by using QuitClaims

If tax avoidance and dishonesty aren’t strong enough to sway you away (IRS has alerted U.S. realtors, tax practitioners, attorneys, and real estate and title companies to this tax avoidance scheme), here’s five reasons why doing so is akin to putting a large dunce hat on your own head as it’s just an illogical action.

First - note that QuitClaims in of themselves do not prevent FIRPTA.

Second - IRS can re-characterize and tax QuitClaims as gifts.

Third – you owe what you owe and don’t owe what you don’t owe. FIRPTA is merely a withholding tax just like your payroll tax. On the sale return you claim the FIRPTA tax paid and receive back as refund any excess of withholding over tax due. FIRPTA is not an extra tax or cost.

Fourth – while, yes, FIRPTA typically doesn't apply to a domestic LLC that has multiple members (foreign or domestic), don’t suddenly form one after your sale and pretend the property was sold by the LLC and exempt from FIRPTA

Fifth – if you’re a foreign corporation and don’t like corporate cap gain rates (and that Florida taxes corps but not individuals) don’t suddenly after your sale quitclaim the USRPI to your foreign individual shareholder and pretend the property was sold by the individual and thus a claim a reduced capital gain rate at a 20 percent maximum rate.

The IRS is well aware of transactions where a foreign corporation arranges a sale of its USRPI to a transferee (buyer) and quitclaims the USRPI to its foreign individual shareholder, so that the individual (instead of the corporation) sells the USRPI to the transferee (buyer) at a reduced capital gain rate (a 20 percent maximum rate).

If the foreign corporation had directly sold the USRPI itself, it could be subject to a capital gain rate as high as 21 percent (35 percent for transactions that close before January 1, 2018). The foreign corporation (and not the individual) is the taxable party in this transaction and must send Form 8288 and Form 8288–A to the IRS with a withholding tax equal to 21 percent (35 percent for transactions that close before January 1, 2018) of the gain in the USRPI, unless it qualifies for reduced withholding and submits Form 8288-B to the IRS.

Internally at IRS, taxpayer reporting containing this tax avoidance scheme criteria is flagged along with all quitclaim 8288-B applications and scrutinized by IRS Unit Classification M/S 4160 in Ogden, UT.


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