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Discover the ins and outs of junior loans in real estate transactions in the US. Learn how they work, their benefits, and potential considerations.

When it comes to real estate transactions in the US, there are various financing options available to buyers. One such option is a junior loan. But what exactly is a junior loan in a real estate transaction? In this article, we will delve into the details of junior loans, exploring their purpose, benefits, and potential considerations.

Understanding Junior Loans

A junior loan, also known as a subordinate loan, is a loan that is secured by the same collateral as the primary loan, but has a lower priority in terms of repayment. In simpler terms, it means that if the borrower defaults on their payments and the property is sold to recover the debt, the primary loan will be paid off first before the junior loan.

Benefits of Junior Loans

  1. Increased Financing: Junior loans can help buyers secure additional financing for their real estate transactions, allowing them to bridge the gap between the primary loan and the total purchase price of the property.

  2. Lower Down Payment: By utilizing a junior loan, buyers may be able to make a smaller down payment on the property

Home equity loans and home equity lines of credit (HELOCs) are common examples of junior mortgages. You may use a junior mortgage when taking out a piggyback second mortgage to avoid paying private mortgage insurance on a first home loan.

What is a JR loan?

A second mortgage or junior-lien is a loan you take out using your house as collateral while you still have another loan secured by your house. Home equity loans and home equity lines of credit (HELOCs) are common examples of second mortgages.

What is the difference between a junior and senior loan?

Senior loans (or “senior mortgages” or “first mortgage” or “first-lien” debt holders) are in first position (i.e. they have a first-lien priority). Junior loans (or “junior mortgages” or “second-lien” debt holders or mezzanine capital) have a lower priority than a first or prior (senior) lender.

Is a junior loan a second mortgage?

A junior mortgage refers to a second mortgage that is granted in conjunction with the approval of an effective primary or prior mortgage. The primary mortgage is referred to as a senior mortgage. A junior mortgage can also be a third, fourth, or fifth mortgage granted after the security of a senior mortgage.

What is the difference between first lien and junior lien?

Senior Lien – Is the first security interest placed upon a property to secure payment of a debt. (1st mortgage.) Junior Lien- A loan taken out using a property as collateral while there is still another loan secured by the same property Multiple junior liens may be taken out on one property.

What is the real estate withholding rate in California?


The standard withholding is 3.33% of the Sales Price. Sellers can pay more, but not less unless they take advantage of Part VI and request an Alternative Amount, like 12.3% on the gain amount for an individual or 8.84% or 13.8% for a corporation, depending on the type of corporation.

Where is the amount of withholding on real property transactions reported on the Form 540?

California withholding is reported on Form 540/540NR either as real estate and other withholding (Form 540, line 73 or Form 540NR, line 83), representing withholding reported via Forms 593 or 592-B or as California income tax withheld (Form 540, line 71 or Form 540NR, line 81), representing all other sources of

Frequently Asked Questions

What is the withholding rate?

SDI Rate. The SDI withholding rate for 2024 is 1.1 percent. Effective January 1, 2024, Senate Bill 951 removes the taxable wage limit and maximum withholdings for each employee subject to SDI contributions.

Is a FIRPTA the same as a non-foreign affidavit?

You may be asked to sign a non-foreign affidavit, also called a FIRPTA, if you are selling property. It is one of the many documents that will be a part of your set of seller documents. People can get a little confused or upset when they see language on the affidavit concerning a 10% or 15% IRS withholding.

Who provides FIRPTA affidavit?

Internal Revenue Code (“IRC”) §1445 provides that a transferee (Buyer) of a U.S. real property interest must withhold tax if the transferor (Seller) is a “foreign person.” In order to avoid withholding, IRC §1445 (b) requires that the Seller (a) provides an affidavit to the Buyer with the Seller's taxpayer

What forms do buyers need for FIRPTA?

It is the buyer's responsibility to complete forms 8288 and the 8288A these require the Buyer's name, address and ITIN as they are the “Withholding Agent”. Certain exceptions may apply that exempt the buyer from withholding and can be found here; IRS – Exceptions from FIRPTA withholding.

Who needs to file form 8288?


A buyer or other transferee of a USRPI must complete and file Part I of Form 8288 to report and transmit the amount withheld. A corporation, QIE, or fiduciary that is required to withhold tax under section 1445(e) must complete and file Part II of Form 8288 to report and transmit the amount withheld.

What is form 8288-A for buyer?

Buyers (transferees), who are generally the withholding agents, must use Forms 8288 and 8288-A to report and pay to the IRS any tax withheld on the acquisition of U.S. real property interests from foreign persons.

Do you need a FIRPTA certificate?

FIRPTA Certificate: A FIRPTA certificate is used to to notify the IRS that the seller of real estate is not a foreign-person. When a foreign person sells real estate, the IRS wants to know about it. Even though some capital gains income tax is exempt to foreign persons, real estate is not exempt.

What if a seller is classified as a foreign person?


If the seller is a foreign entity or person, the buyer must withhold the 10% and remit the tax to the IRS within 20 days of the date of closing. If the buyer fails to do so, the buyer is liable to the IRS for the tax that should have been withheld plus penalties and interest.

What is seller certification of non-foreign status?

What Is a Certification of Non-Foreign Status? With a Certification of Non-Foreign Status, the seller of real estate is certifying under penalty of perjury, that the seller is not foreign. Therefore, the seller and the transaction will not have the withholding requirements.


Can a non US citizen sell real estate?

In addition, non-U.S. citizens are liable for paying local property taxes. And when selling a property in the United States as a non-U.S. citizen, capital gains tax will typically apply as well. “When selling a property in the U.S. there are special withholding provisions that must be complied with,” says Ailion.

What is the withholding on the sale of real estate by foreign person?

The IRS requires 15% of the sales price be withheld on the sale of United States real property interests by foreign persons (on sales above $1,000,000), and either 15% or 10% on sales between $300,001 and $1,000,0000, and either 15% or $0 for sales of $300,000 and under.

Who is considered a foreign person?

A foreign person includes a nonresident alien individual, foreign corporation, foreign partnership, foreign trust, foreign estate, and any other person that is not a U.S. person. It also includes a foreign branch of a U.S. financial institution if the foreign branch is a qualified intermediary.

Which mortgage is in first lien position taking priority over all other liens?

Once the existence of a purchase-money mortgage is established, the purchase-money lien has priority over all other liens on real property.

What are the risks of a second lien?

Second-lien debt also comes with more risk, and it ranks lower than other high-risk loans should a business file for bankruptcy or go through liquidation. These subordinated loans might yield insufficient collateral in the event of a bankruptcy.

What does 2nd lien position mean?

A second mortgage or junior-lien is a loan you take out using your house as collateral while you still have another loan secured by your house.

Are second lien loans secured against the property?
The lender of a second mortgage becomes the second lienholder against the mortgaged property. If the borrower fails to pay their mortgage and foreclosure takes place, the second lender gets paid only after the first lender receives the balance of the outstanding debt.

Is first lien more senior than second lien?

The difference between the first and second lien debt is the seniority of their claims against the pledged collateral per the intercreditor agreement. First lien debt has the higher priority claim on the company's pledged collateral, whereas the second lien is of lower standing.

What if the seller is a foreign person?

FIRPTA, the Foreign Investment in Real Property Transfer Act, is part of the U.S. tax code. It requires buyers of real estate to withhold up to 15% of the sale price when the seller is a foreign person.

What is a junior loan in a real estate transaction

What will the IRS withhold when a foreign person sells a US property?

FIRPTA: What It Is and How It Works

FIRPTA requires that any individual who is selling a property in the U.S. that is not a U.S. citizen will have 15% of the gross sales price withheld at closing.

What is the meaning of sold As is?

"As is" denotes that the seller is selling, and the buyer is buying an item in whatever condition it presently exists, and that the buyer is accepting the item "with all faults", whether or not immediately apparent.

What federal act requires that if the seller of real property is a foreign person the buyer is required to withhold 15% of the sales price?

The disposition of a U.S. real property interest by a foreign person (the transferor) is subject to the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) income tax withholding.

What is considered a foreign person?

The term “foreign person” means any individual or entity that is not a United States citizen, a permanent resident alien, or an entity organized under the laws of the United States or any jurisdiction within the United States.

What are the two frequently encountered types of subordination?

Broadly, there are two types of subordination: structural (common in the UK and mainland Europe) and contractual (common in the US). On a contractual subordination, loans are made to the same company but the senior creditor and junior creditor agree priority of payment by contract.

What are the types of subordination agreements?

Two types of subordination agreements are: Executory Subordination and Automatic Subordination. These differ in the timing of when priority rights are given and the contractual performance required by the subordinated party.

What are the requirements for a subordination agreement?

A subordination agreement must be signed and acknowledged by a notary and recorded in the official records of the county to be enforceable.

What is an example of a subordination clause in real estate?

Lender and Tenant do hereby covenant and agree that the Lease with all rights, options, liens and charges created thereby, is and shall continue to be subject and subordinate in all respects to the lien created by the First Lien Mortgage, including any renewals, modifications, consolidations, replacements and

What are problems with subordination?

Problems with subordination include placing main ideas in subordinated clauses and phrases and including too many subordinate ideas in one sentence.

  • How do I report foreign property sale to the IRS?
    • Reporting the sale of foreign property to the IRS and FinCEN

      If the income you made from the sale of your foreign property was deposited into a foreign bank, you may have to report it on a Foreign Bank Account Report (FBAR) by using FinCEN Form 114. You may also need to file FATCA Form 8938.

  • Are foreigners taxed on real estate capital gains?
    • In general, US capital gains are not taxable to nonresident aliens. Rather, capital gains are considered sourced at the location of the Taxpayer. This general rule does not apply to individually owned US real estate by a foreigner, non-resident alien. Individually owned real estate is taxed on the sale as capital gain.

  • How to sell foreign real estate?
    • Six steps to selling property abroad
      1. Choose the right time to sell. As with any investment, you'll want to sell at a time when you can maximize profits.
      2. Work with a real estate agent.
      3. Prepare your documents.
      4. Wait for someone to make an offer.
      5. Sign the sales contract and pay any fees.
      6. Report your sale to the IRS.
  • What is the capital gains tax for foreigners?
    • A flat tax of 30 percent (or lower treaty) rate is imposed on U.S. source capital gains in the hands of nonresident alien individuals present in the United States for 183 days or more during the taxable year.

  • What is the purpose of a non-foreign affidavit?
    • A FIRPTA affidavit, also known as Affidavit of Non-Foreign Status, is a form a seller purchasing a U.S. property uses to certify under oath that they aren't a foreign citizen. The form includes the seller's name, U.S. taxpayer identification number and home address.

  • What is a seller's certification of non-foreign status?
    • Certification of nonforeign status.

      The transferor provides a certification of nonforeign status signed under penalties of perjury that states that the transferor is not a foreign person, and provides the transferor's name, TIN, and address.

  • Why do you need a FIRPTA certificate?
    • FIRPTA Certificate: A FIRPTA certificate is used to to notify the IRS that the seller of real estate is not a foreign-person. When a foreign person sells real estate, the IRS wants to know about it. Even though some capital gains income tax is exempt to foreign persons, real estate is not exempt.

  • What is the affidavit of foreign status?
    • General Instructions: Purpose: Use Form W-8 or a substitute form containing a substantially similar statement (affidavit) to tell the workplace, payer, mortgage interest recipient, middleman, broker, or barterer that you are an exempt foreign person not subject to backup withholding rules or certain U.S. information

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