Exceptions to the Buyer’s Burden under FIRPTA

When real property in the U.S. is transferred by a foreign seller, the transfer is subject to tax withholding under the Foreign Investment in Real Property Tax Act (FIRPTA).  As of February 16, 2016 the withholding rates are as follows:

  • If the amount realized (generally the sales price) is $300,000 or less AND the buyer will use the property as his/her residence, no withholding is required.
  • If the amount realized exceeds $300,000 but does not exceed $1,000,000 AND the buyer will use the property as his/her residence, then the withholding rate is 10% of the full amount realized.
  • If the amount exceeds $1,000,000 then the withholding rate is 15% on the entire amount, regardless of the buyer’s use of the property.
  • On all other transfers by a foreign person, the withholding rate is 15% of the entire amount regardless of the buyer’s use of property.

Under FIRPTA, it is often a surprise to hear that the obligation to withhold taxes is actually that of the buyer and not the foreign seller.  This news can concern a buyer who may wonder what this burden entails, whether there are any exceptions to their burden to withhold, and whether they can feel comfortable exercising the exceptions.

The following are a few of the most commonly used exceptions to the buyer’s burden under FIRPTA:

  • The seller is not actually a foreign person.  This may seem obvious, but when a person’s foreign status is not certain to the buyer, the buyer may feel uncomfortable not withholding under FIRPTA.  In this case, the buyer can breathe easy if the seller is able to deliver to them a written certification signed under penalties of perjury, stating that the seller is not a foreign person and containing the seller’s name, US taxpayer identification number and address.  If the seller delivers this certification, the burden is shifted from the buyer (just as long as the buyer does not have actual knowledge that the certification by the seller is false).
  • The purchase price is $300,000 or less and the property will be the buyer’s personal residence.  This exception comes up very often and a buyer is asked to sign an affidavit stating that the purchase price is $300,000 or less and that the buyer or a member of their family has definite plans to reside at the property for at least 50 percent of the number of days the property is in use during each of the first two 12-month periods following the purchase.  Buyers in this circumstance often wonder whether they should sign such a statement if they have the burden to withhold, and may worry about what could happen to them if they sign it and then change their mind in a year…  In this case, buyers can rest assured that as long as they are honest in signing the affidavit, and at the time do not reasonably anticipate an actual change in their intentions, the burden to withhold under FIRPTA is shifted from the buyer.
  • Seller obtains a withholding certificate from the IRS.  If a foreign seller obtains a withholding certificate from the IRS that reduces or excuses withholding of taxes, then the buyer’s burden is reduced to only withholding the lesser amount per the certificate or eliminated entirely if the certificate excuses withholding.

If there are no exceptions that apply to your buyer’s purchase from a foreign seller, then the buyer must withhold the required percentage of the seller’s proceeds for timely remittance to the IRS.

As always, if you have any questions about the foregoing or questions about transactions involving foreign sellers, we urge you to consult with your local real estate attorney.

Sincerely,

Berlin Patten Ebling, PLLC

Article Authored by Jessica Featherstone, Esq.  jfeatherstone@berlinpatten.com

This communication is not intended to establish an attorney client relationship, and to the extent anything contained herein could be construed as legal advice or guidance, you are strongly encouraged to consult with your own attorney before relying upon any information contained herein.

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