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.

All rights reserved. This copyrighted material may not be re-published without permission. Links are encouraged.

 www.berlinpatten.com 

 SARASOTA

3700 South Tamiami Trail, Suite 200, Sarasota, FL 34239   P (941) 954-9991  F (941) 954-9992

 VENICE

247 Tamiami Trail South, Suite 201, Venice, FL 34285  P (941) 955-9991  F (941) 484-9992

 LAKEWOOD RANCH

8130 Main Street, Suite 206, Lakewood Ranch, FL 34202   P (941) 907-9022  F (941) 907-9024

Did you find this real estate law content useful, but need actual legal council?

Speak to a real estate attorney!

, ,

Foreign Buyers & Sellers-Speaking Their Language

In Florida we are fortunate to have many foreign buyers and sellers of real estate. Sometimes they show up on a realtor’s threshold and are ready to purchase a property to use as an investment, or a vacation home, or a reason to remove their money from their home country, or to house their children…
Santa Claus is Coming

Santa Claus is Coming to Town!

Rudolph “the Red-Nosed Reindeer” is selling his spring retreat in sunny Sarasota, Florida to Santa Claus for $295,000. As many know, Santa is a resident of the North Pole which is not technically affiliated with the United States. Rudolph and Santa used the standard FRBAR Contract prepared by Realtor Hermey the Elf. Pursuant to Paragraph…

Examples of New FIRPTA Withholding Rates Applied

How Much Will Your Foreign Seller Need to Withhold – 0%, 10%, 15%? As noted in our January 16, 2016 blog, the FIRPTA withholding rates for real estate sales by foreign persons for closings on or after February 17, 2016 will change in certain instances.  For some foreign sellers, the current $300,000 exception could still…

FIRPTA Witholding Rate Set to Increase in February

When a foreigner is involved in a real estate transaction, it is important to be mindful of the Foreign Investment Real Property Tax Act (or “FIRPTA”). FIRPTA was passed in 1981, and requires foreign persons to pay U.S. income tax on gains made from selling real estate in the United States. Interestingly, the duty is…

BUYER IS IN CONTROL OF FOREIGN’S SELLER’S FIRPTA WITHHOLDING UNDER THE REVISED 8/13 FLORIDA REALTORS/FLORIDA BAR (“FR/BAR”) CONTRACT FORMS.

  Under the revised FR/BAR contract forms, Section 18 Standard V replaces the FIRPTA RIDER previously known as Rider I.  Apparently, agents were neglecting to incorporate Rider I into the Contract when the seller was a “foreign person” under the Foreign Investment in Real Property Tax Act (“FIRPTA”).   With the increase in transactions involving foreign…

Increase in Real Estate Transactions Involving Foreign Buyers & Sellers

  The local press recently published an article that spoke to the increase in real estate transactions involving foreigners.  It is true that instances in which a transaction involves a foreign buyer or seller have increased substantially. We expect that trend to continue. Transactions involving foreigners can be quite complex, and involve issues that are…

Short Sales and FIRPTA Witholding

Originally Published: 8/3/2012 Foreign Sellers who complete a short sale may be subject to the withholding requirements of the Foreign Investment in Real Property Tax Act, also known as FIRPTA. FIRPTA is particularly important to understand if you are a working on any transaction in which a “foreign person” is selling property in the United…

A Refresher on the Key Points of FIRPTA

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…
Menu