Greg: Steph, it’s been a couple of weeks. It’s nice to see you again.
Steph: Nice seeing you, too.
Greg: All right. I have a question for you, and I don’t know anything about this subject, or very little, but I’ve been reading about it lately in the news. When a non-U.S. citizen wants to make a real estate purchase in the U.S., are there some things we need to be careful about or are there some special rules for that kind of situation?
Steph: Yes, there are. A person that has an intent to become a citizen, they have the right to purchase real estate in the United States. Even if they’re not a citizen, they can. They actually have the right under Kentucky law, if they intend to be naturalized, to be able to purchase property. There is a specific escheatment law, though, in Kentucky that you need to watch out for. If someone is a non-resident alien and they do purchase, if they have not become a citizen or sold the property to a citizen after 8 years, the state of Kentucky can actually take that property back. They can get it.
It’s just very concerning if you are representing a client that is a non-U.S. citizen. While they’re not prohibited or barred from buying real estate, just you have to remember the purchase is subject to the escheatment rights of the state of Kentucky, meaning the state of Kentucky can bring an escheatment action, a lawsuit to take the property from the non-U.S. citizen if he or she owns the property for 8 years or longer.
Greg: Okay. I want to make sure I have this 8-year window in my mind. The state would have to wait until after 8 years or any time in the first 8 years they could come in?
Steph: No, they-
Greg: It’s after 8?
Steph: Yeah, it’s after 8 years. I think the public policy surrounding this law is that the person potentially … The only reason the state would be getting involved is if there was non-payment of taxes. Potentially, the buyer had bought a piece of property and then left the state and was not able to be found and no taxes were being collected. That seems like the likely scenario.
The other issue that has come up a few times that I’ve been involved in transaction is that if a non-resident alien purchases a piece of property, then when they go to sell it, there is a tax withholding that’s required. If you’re involved in a closing and you’re listing a piece of property, if the owner of the property is a foreign person, meaning they’re a non-U.S. citizen, there is a tax withholding. It’s called the Foreign Investment Real Estate Tax Act, FIRPTA.
Greg: FIRPTA, nice.
Steph: Yes. It actually puts the onus on the buyer that the buyer is responsible that the correct amount is withheld. The rationale of holding the buyer responsible is that the U.S. can seize the property if the proper amount is not withheld. If you bought a piece of property from a non-U.S. citizen and you didn’t use a reputable closing attorney that didn’t do the withholding and you sell it later on, the U.S. could come and seize your property. That’s why they put this on the buyer. That’s why it’s just very important whenever you’re selling property and buying property you utilize a title company that is known to you so that you make sure that they are up on all the laws and are following all the laws. This is just one that could really cause gum in the works if it turned out that your seller was a non-U.S. citizen.
Greg: If someone were buying a house and they closed with you at Horne Title, is that something that would go a long way towards alleviating their worry and fear for the next however many years that they were getting, as you said, gummed up in the works, that that helps protect them?
Steph: I think that it’s just you’ve really got to make sure that the person handling your closing is asking all the questions so that the withholding, the proper forms are filled out for the residence. It’s just really, really important to make sure that … because it is a 15% withholding rate if it’s not the person selling personal residence. If it’s a personal residence, there is an exemption up to $300,000 there would be no charge. Many, many homes there is actually no withholding because it doesn’t trigger, but sometimes it does. If it’s $300,000 to $1 million, it’s 10%. Then a lot of times, though, foreign investments are done for investment reasons.
Steph: That would be 15%, and there’s just a form that needs to be filled out. It’s just very important to look out for this.
Greg: Is that a form that you’d normally have at the closing? Is that why people should-
Steph: We have it when there is a situation of this nature.
Greg: Okay, great.
Greg: All right. One more thing to look out for.
Greg: I appreciate the heads-up. Thanks so much.
Steph: Okay. You’re welcome.