An Agent's Guide to FIRPTA
Real estate professionals need to know that the Foreign Investment in Real Property Tax Act – better known as FIRPTA – provides that a buyer must withhold and submit to the IRS, a portion of the gross sales price on the sale of a U.S. property by a “foreign person.” In fact, if the seller is foreign, and the buyer fails to withhold the designated tax, the buyer may be held liable for the tax.
Note that FIRPTA withholding does not apply to sellers who are resident aliens, only to those who are non-resident aliens or foreign entities.
While real estate agents, closing agents, and escrow or title companies are not permitted to provide legal or tax advice regarding FIRPTA, here are some answers to a few commonly asked questions surrounding it:
Are all real estate transactions subject to income tax implications?
Yes. U.S. tax law requires that everyone, foreign or domestic, must pay income tax on disposition of interests in U.S. real estate. United States persons are required to pay taxes on such dispositions along with their other income. FIRPTA was enacted to facilitate the collection of applicable income tax on amounts realized from real estate sales by foreign persons.
What does FIRPTA require the buyer to do at closing?
- The buyer is required to determine if all sellers have provided the buyer with proof of exemption to FIRPTA withholding.
- If any seller does not provide proof, the buyer completes the FIRPTA withholding forms and remits 10-15 percent (the appropriate percentage depending on the factors outlined below) of the contract sales price to the IRS.
- Any buyer who fails to comply may be held liable by the IRS for the tax, plus penalties, and interest.
What are the exemptions to the buyer’s FIRPTA withholding requirements?
- No withholding is required if the buyer receives the seller’s Certification of Non-Foreign status (CNFS) or a Qualified Substitute Statement (QSS) as evidence that the seller is not a foreign person.
- No withholding is required if the contract sales price does not exceed $300,000 and the buyer certifies that the property is being acquired for use by the buyer as a residence (as outlined below).
- The withholding percentage is reduced to 10% if the contract price is greater than $300,000, does not exceed $1 million, and the buyer certifies that the property is being acquired for use by the buyer as a residence (as outlined below).
- No (or reduced) withholding is required if the seller provides the buyer with an IRS ‘qualifying statement’ or ‘withholding certificate’ stating that no FIRPTA withholding (or a reduced withholding amount) is required.
What are the residency requirements for an exemption or reduction of FIRPTA withholding on the sale of property acquired for use as a residence?
Any one of the buyers must have definite plans to reside (or have a family member reside) at the property for at least 50 percent of the number of days that the property is used by any person during the first two 12-month periods after the date of transfer.
The important takeaway here is that, because neither the escrow officer nor the title company is permitted to provide legal or tax advice about FIRPTA or any other matter, clients should be advised to seek professional legal or tax advice regarding FIRPTA compliance.
Barbara Pronin is an award-winning writer based in Orange County, Calif. A former news editor with more than 30 years of experience in journalism and corporate communications, she has specialized in real estate topics for over a decade.
This material is not intended to be relied upon as a statement of the law, and is not to be construed as legal, tax or investment advice. You are encouraged to consult your legal, tax or investment professional for specific advice. The material is meant for general illustration and/or informational purposes only. Although the information has been gathered from sources believed to be reliable, no representation is made as to its accuracy.
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