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Real estate Q&A: Buyer Must Collect Tax from Foreign Seller

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By Gary M. Singer

tax_forms_cash(MCT)—QUESTION: I am buying a home from a foreign investor. The closing agent is telling me that I need to submit a tax return and 10 percent of the sales price to the Internal Revenue Service. Is this for real?

ANSWER: Yes. The Foreign Investment in Real Property Act was created more than 30 years ago to ensure that foreigners who own property in the United States pay the taxes due on the sale. The law puts the burden of collecting the tax on the domestic buyer, requiring you to collect and submit 10 percent of the full sales price.

This money comes from the seller’s proceeds, but the buyer is responsible for making sure that the money is submitted, and the buyer can be held accountable if it is not. This 10 percent requirement exists even if the property is heavily mortgaged, creating an issue with short sales. As with any tax, there are many rules and exceptions here.

The most common exception to collecting the tax: when the cost of the home is less than $300,000 and the buyer will occupy the home at least half the time it is used over the next two years.

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