Acronyms have saturated our everyday lives and the real estate realm is no exception. There is one acronym that may sound familiar, but its impact may be very uncommon to you. FIRPTA is the Foreign Investment Real Property Act of 1980, which was designed to ensure that foreign owners of US property pay their share of taxes on the profits (or gain) when they sell.Why is that important to a buyer?
FIRPTA involves a withholding tax and not an income tax and therefore, the tax is paid by the payer (i.e. the buyer) of the income in anticipation of the seller’s tax.
This can be an issue for many reasons:
- On many occasions, we do not find out that someone is “foreign” under FIRPTA until closing.
- Most buyers do not realize that the duty to remit this money to the IRS and the ultimate liability falls on them.
- Many sellers are not aware of FIRPTA and therefore do not pre-plan and apply for a Withholding Certificate for reduced withholding at closing.
Who is considered a foreign person under FIRPTA?
A foreign person includes a non-resident alien individual, a foreign corporation that has not made an election to be treated as a domestic corporation or a foreign partnership, estate or trust. It does NOT include a resident alien who can pass either the Green Card Test or the Substantial Presence Test.
How much will the buyer need to pay the IRS at closing?
Generally, it will be 15% of the sales price. There are some exceptions to this amount, including those based on the sales price, receipt of a Withholding Certificate, multiple sellers not all of whom are foreign persons, and others. The withholding amount needs to be remitted to the IRS within 20 days of closing or the 20th day after the IRS mails a copy of the withholding certificate or notice of denial if the seller had applied for such.
The bottom line:
The best method of avoiding closing disasters and delays is communication and pre-planning. Ensure all of the owners/sellers of a property have a tax identification/social security number and that they will be able to complete a non-foreign affidavit at closing. If not, make certain all parties speak with their legal counsel and/or their tax advisor to walk them through the process, give them advice on their role in the process, and then communicate with the title company to safeguard a smooth closing.