Chapter 6: In This Chapter

Laws and Regulations Four Important Federal Laws Taxpayer Identification Number Taxation Immigration and Visas Risk Factors and Reduction

Page 116

Federal Restrictions and Reporting Requirements

Few federal restrictions on type, location, or value of property

Reporting requirements for:• Purchases of agricultural land• High-value properties or investment interests

States may impose other restrictions and requirements

Page 117

State Regulation

Licensing and regulation

Agency relationships Environmental issues• Coastlines• Building requirements

Page 118

Municipal and Community Regulation

Zoning Building permits Environmental regulations Covenants, Conditions, and Restrictions

(CC&Rs)

Page 119-120

Four Important Federal Laws

Antitrust Real Estate Settlement

Procedures Act (RESPA)

Fair housing law Federal law that

governs contact• CAN-Spam Act

Page 122-124

Taxpayer Identification Number (TIN)

Necessary to transact real estate business IRS Form W-7

Page 124

Property Tax

States and municipalities Based on assessed value• Set dollar amount• Percentage

Paid in arrears Paid by lender from escrow if property is

mortgaged

Page 124-125

Transfer Tax

State, municipal, or county Based on sales price• Typically a specified amount per US $100, $500, or

$1,000 of purchase price Buyer, seller, or both may be required to pay

Page 125

Federal and State Estate Tax

Tax on bequests received by heirs, including real estate assets

Exemptions less for foreigners Non-citizen surviving spouses not eligible for

marital exemption Currently top federal rate of 35% on value of

estates above US $5 million Ongoing developments in policy

Page 125

Income TaxesDefinition of Resident Status for U.S. Tax Purposes

U.S. Citizen Taxed on worldwide income; credits are allowed for foreign taxes paid

Resident Alien Taxed on worldwide income; credits are allowed for foreign taxes paid

Nonresident Alien Taxed only on U.S.-sourced income

Note: These definitions are different than the classifications for immigration; tax treaties may override these rules.

Page 126

Capital Gains and Withholding Taxes

Nonresident taxes:• Capital gains on sale of U.S. real property taxable,

regardless of time spent in country• 30 percent withholding tax on all U.S. investment-

type income, payable within 20 days after transaction

• Rental income connected to U.S. trade or business taxed as if received by U.S. citizen

Page 126-128

1031 Tax-Deferred Exchange

Four Basic Rules of 1031 Exchanges

1. Property must be held for investment or productive use in trade or business; dealer property does not qualify.

2. Property must be exchanged for like-kind property.

3. Replacement properties must be identified within 45 days after the relinquished property is transferred.

4.The exchange must be completed (replacement property received) by the earlier of 180 days or the tax return due date.

Generally, defers capital gains due on U.S. properties

Page 128-129

Foreign Investment in Real Property Act (FIRPTA)

Buyer of U.S. property from foreign person must withhold 10% of purchase price • Remit to IRS within 20 days of transaction

Withholding agent subject to civil and criminal penalties for noncompliance• Real estate professionals liable for amount of

commission Exemptions:• Personal residence under US $300,000• IRS provides statement that seller is exempt

Page 129-130

Immigration and Visas Overview

Advise clients to contact U.S. Consulate in home countries

I-94 Form US-VISIT Visa Waiver Program

Page 130-131

Visa Waiver Program Requirements

Authorization to travel through Electronic System for Travel Authorization (ESTA)

Intent to stay 90 days or less Sufficient funds Approved air or sea carrier Machine-readable passport• Digital photo• Integrated electronic chip• Valid at least 6 months past stay

Page 131

B-1 and B-2 Visas

B-1 for certain business activities• May not receive U.S.-sourced salary• Direct management of business not allowed• 6-month stay (can be extended)

B-2 for pleasure and tourism• May not engage in business activities

Page 132-133

EB-5 Immigrant Investor

Investment must:• Be in a Regional Center• Be at least US $1 million• Provide goods or services to U.S. markets• Create full-time employment for 10 U.S. workers

Investor/visa holder must be involved in management of business

Page 133-134

Other Visa Categories

L-1 Intracompany Transferee E-1 Treaty Trader E-2 Treaty Investor H-1B Specialty Occupations O-1 and P-1 Extraordinary Specially Designated Nationals (SDN) List

Page 135

Health and Auto Insurance Health insurance• Privatized (except for

seniors)• Expensive• Short-term policies

available Auto insurance• Required in all states• Premium depends on

location, make and model of car, driver, and intended use

Page 136-137

Errors and Omissions Insurance

Insures real estate professionals against liability for claims of negligence or mistakes

Protects professionals from bearing the full cost of legal defense

Policies available for firms and individuals• Most insured through firms

Does not protect against intentional, fraudulent, or unlawful activity

Page 137

Expanding Your Business

Opening a brokerage firm• Responsibility for every transaction• Responsibility and risks associated with business

Offering property management services• Owners expect professional service that meets

investment objectives• Experience and education required

Page 137-138

Working with Developers

Some states require registration of development properties

Requirement may apply to properties in-state, out-of-state, and out-of-country marketed in the state

Real estate professional potentially liable for noncompliance

No U.S. trade show sales of development properties

Page 138