A closer look at the Foreign Investment in Real Property Tax Act

Have you ever been involved in a real estate transaction where the seller wasn’t a U.S. citizen? If so, you’re likely familiar with this acronym, and initially it might have stirred a sense of concern. If you haven’t encountered this situation yet, it’s quite possible you will someday. It’s important to know why and how the Foreign Investment in Real Property Tax Act (FIRPTA) applies. Failing to understand its implications can lead to legal and financial complications for both buyers and sellers.

What is FIRPTA?
FIRPTA stands for Foreign Investment Real Property Tax Act. Established in 1980, this law imposes U.S. income tax on foreign persons selling U.S. real estate. Under FIRPTA, if you buy U.S. real estate from a foreign person, you may be required to withhold 10% to 15% of the amount realized from the sale—usually the purchase price.

When does FIRPTA apply?
FIRPTA applies when the property being purchased is being sold by a foreign person and the sales price is $300,000 or more. Under FIRPTA, a “foreign person” refers to any non-resident alien individuals who do not meet the substantial residency test, as well as foreign corporations, LLC’s, or partnerships.

How does FIRPTA tax get paid?
To ensure that the tax is collected, FIRPTA imposes a withholding requirement on the proceeds of transactions subject to the tax. This amount is reflected as a debit on the seller’s side of the settlement statement at closing and is payable to the IRS. In general, the obligation to collect the tax (or proof of its non-applicability) falls on the person or entity that the IRS has designated as a withholding agent—usually the buyer. A title company does not act as the withholding agent, so we recommend that the buyer consult either an attorney or accountant who is knowledgeable of the process. Sellers should also discuss this with a professional to confirm whether FIRPTA tax applies, at what amount, and how to proceed. The amount determined to be paid must be sent to the IRS within 20 days of closing along with completed IRS forms 8288 and 8288A.

When does FIRPTA not apply?
Certain exemptions and exceptions exist. For example, FIRPTA would not apply when the seller is a U.S. citizen or has a permanent residence or Green Card with a social security number. Also, sales prices below $300,000 where the buyer is using the property as a residence would be exempt. Some sellers may make claims of “substantial presence”—in other words, they are physically present in the United States long enough during a calendar year to be considered a US resident for tax purposes. Such cases should only be dealt with through an attorney or accountant, and the necessary waiver forms must be completed.

What is my responsibility in a transaction?
Depending on your role in the transaction, your responsibilities to ensure FIRPTA tax is handled properly varies. Buyers should seek legal or tax accountant assistance. Complete IRS forms 8288 and 8288A , make sure the funds due are collected at settlement, and submit the forms and funds due to the IRS. Sellers should seek legal or tax advisor assistance and disclose foreign residency.

As a buyer’s agent, you’ll need to discern the seller’s residency status and determine whether FIRPTA applies. You should also notify the title company involved. As a seller’s agent, disclose foreign residency in the listing contract and special agreements of the contract. Both buyer and seller agents should suggest that their clients seek legal or tax advisor assistance.

When you determine that FIRPTA tax applies to the real estate transaction you are handling, be proactive. Make sure that the buyers and sellers are aware of the issue, that they both have reached out to an accountant or attorney and that they are completely prepared for the amount that should be withheld at closing. Make sure you let the title company know when you have a FIRPTA case, so they are prepared to cut a check from the seller’s proceeds. No matter your role in a real estate transaction, at Trident Land Transfer, our team will help you better understand the process and provide key resources so you can make informed decisions and have a successful and compliant real estate deal.