Originally Published: 4/24/2012
Foreign Sellers may be subject to the withholding requirements of the Foreign Investment in Real Property Tax Act, also known as FIRPTA. FIRTPA is important for everyone to understand, but is particularly important if you are a working on any transaction in which a “foreign person” is selling property in the United States. The key issues associated with FIRPTA have been summarized below. As with any federal law, the language is often confusing and is filled with exceptions, so it is important to consult a real estate attorney and tax professional if you are involved in any transaction involving a foreign Seller.
- Who and what is affected? FIRPTA only applies when a “foreign person” sells property in the United States. US citizens and Non-citizens who are residents are not bound by FIRPTA.
- What is the selling price threshold for FIRPTA to apply? On residential properties, FIRPTA applies if the selling price is greater than $300,000.00. On non-residential property, FIRPTA always applies.
- Are there any exemptions that apply?
- If (a) a Buyer is acquiring a property for use as his or her personal residence, and (b) the sales price is less than $300,000.00, then the transaction would be exempt from FIRPTA;
- If the Seller furnishes the Buyer with a Non-Foreign Person Certification, then the transaction would also be exempt from FIRPTA; or
- If, (a) prior to the closing date, the Seller applies for an IRS withholding certificate that states that no withholding is to be applied, and (b) furnishes such withholding certificate (issued by the IRS) to the Buyer within 90 days from the closing date, then the transaction will not be subject to FIRPTA withholding (note that although FIRPTA relates only to transactions involving foreign persons, it is the Buyer’s responsibility to insure that FIRPTA has been properly complied with).
- How much must be withheld? The Buyer, Real Estate Professional, and/or Attorney/Closing Agent must withhold 10% of the GROSS purchase price to be applied to the Seller’s tax obligations and avoid any IRS penalties.
- When and where should money be deposited to the IRS? The money withheld must be sent to the IRS within twenty (20) days from the closing date or disbursement of funds. The attorney handling your closing should timely process the FIRPTA paperwork to avoid liability to the Buyer.
- Who is liable for the failure to properly withhold and/or timely remit under FIRPTA? Interestingly, liability for failure to properly withhold the correct amount and/or timely remit the appropriate amount(s) to the IRS falls on the Buyer, and not the Seller. As such, any Buyer should be very careful to insure that the closing agent handling the transaction is aware of the requirements of FIRPTA, and more importantly, is taking steps to insure that they are being complied with to the letter.
- Is there an exemption from the 10% withholding when a foreign person is the seller in a short sale? There is no exception, however, in most cases a reduction in the withholding can be applied for from the IRS. A withholding certificate stating that the withholding has been reduced must be obtained before the closing takes place, or the 10% must be held until a withholding certificate can be obtained and remitted. In some cases, it is possible to expedite the process due to hardship.
Again, FIRPTA can be very complicated, and the failure to comply with its requirements can create significant liability to Buyers who are acquiring real property from foreign persons. As such, we strongly recommend that any Buyer who is considering acquiring real property from a foreign person consult with a real estate attorney who understands FIRPTA and its somewhat strict guidelines and a CPA who specializes in FIRPTA related issues.