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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