Real Estate Law
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First, you do not indicate the amount of the sale proceeds realized.
Generally you do not have to withhold in the following situation: You (the transferee) acquire the property for use as a residence and the amount realized (sales price) is not more than $300,000. You or a member of your family must have definite plans to reside at the property for at least 50% of the number of days the property is used by any person during each of the first two 12-month periods following the date of transfer. When counting the number of days the property is used, do not count the days the property will be vacant. For this exception, the transferee must be an individual.
Presuming the the sale price IS more than $300,000 there is not an obvious exception under the IRS rules. I would agree that the withholding should only be on the portion gained by the that party. I would have your CPA send an opinion in writing to the closing agent/attorney to assuage his or her concerns. However, the closing agent/attorney will be unlikely to take the risk as the buyer can come back to the closing agent/attorney for any tax consequences that were not dealt with at closing. If your CPA cannot cite the IRS rule then you may want to consult a tax attorney in your area.
I understand. Then, the first exception that I referred to above may apply.
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