Understanding FIRPTA

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FIRPTA, the Foreign Investment Real Property Tax Act, is a law enacted in 1980 and provides that if the Seller of real estate located in the United States is a foreign person, the Buyer must withhold a tax equal to 10% of the gross purchase price (unless an exemption applies). 26 U.S.C. § 1445(a)

Huh?

Let me explain it like this…  prior to the passing of FIRPTA in 1980, it was possible for a non-US citizen to purchase real estate in the US, sell it at a profit, and not pay a nickel in taxes. As you can imagine, the IRS was none-to-pleased about this. So FIRPTA became law.

Generally speaking, FIRPTA requires that a non-US citizen has to have 10% of a real property transaction (typically based on selling price) withheld as a “deposit” for their potential tax liability. This is the same thing as payroll tax withholding. It doesn’t mean that you won’t get some of that money back (potentially all of it. Or potentially, you may owe more. Welcome to US income taxes…)

The way the law is written, it is the buyers responsibility to withhold this 10% from the seller. In reality (at least in Arizona), the title company will process the paperwork and take care of getting the money to the IRS. I assume that in states that use attorneys to handle closings, the attorneys take care of the FIRPTA paperwork (it would be nice if someone could confirm or deny my assumption in the comments..).

FIRPTA is important for everyone to understand, but it is particularly important if you are a foreign national who owns property in the US (assuming you plan on selling it some day). We’ve had a couple of buyers recently from Canada that weren’t aware of FIRPTA. While it has no impact on their purchases, it could certainly impact them when it comes time to sell their property.

As with any law and US Tax Code, the language is often convoluted, confusing and filled with exceptions. If you’ve read here before, you’ve heard this, but I have to say it again:

I am not a lawyer, nor am I a tax professional. You should always consult an attorney or tax professional for advice. Do not rely on anything you read on the internet. Seek professional help!

To summarize:

1. If a seller of real estate is a “foreign person”, the buyer, real estate agent, escrow officer and/or attorney must insure 10% of the sales price is withheld to apply to the sellers tax obligations. NOTE: Some states may also have additional withholding requirements!

2. US citizens, US Green Card holders, and Non-citizens who meet the “substantial presence test” (based on the number of days actually present in the US — 181 days/yr is my understanding) are not bound by FIRPTA.

3. Even if the seller is a “foreign person”, if a home is purchased for less than $300,000 AND it will be the primary residence of the buyer or his/her family, then FIRPTA does not apply.

4. It is possible to have less than 10% withheld. This requires approval from the IRS and can take several months. Reductions are often granted for:

  • The sale of recently inherited property

  • A sale at a small profit (or a loss)
  • A tax free sale (a like-kind / Section 1031 exchange)

Note: the title company will withhold 10% pending a decision from the IRS.

Here’s a juicy little tidbit for real real estate agents. Can you say “commissionectomy”? (not to mention likely loss of license):

A real estate broker or salesperson for either party can be held liable for the tax that should have been withheld (up to the amount of compensation received), if the broker has actual knowledge that the non-foreign affidavit is false and fails to notify the buyer and the IRS. Under certain circumstances, the broker may also be liable for civil or criminal penalties

Be careful out there!

Here are some helpful links to further understanding FIRPTA:

Actual FIRPTA United States Code (Headache warning! Note: “Transferee” = Buyer, “Transferor” = Seller)

Internal Revenue Service – FIRPTA Withholding
Internal Revenue Service – Exceptions from FIRPTA withholding
Internal Revenue Service – Reporting and Paying Tax on U.S. Real Property Interests
Internal Revenue Service – Withholding Certificates (reductions in 10% withholding)
Internal Revenue Service – Definitions of terms and procedures unique to FIRPTA
Internal Revenue Service – Foreign Persons Involved in U.S. Real Estate Transactions

Arizona Association of Realtors – The Foreign Investment in Property Tax Act (FIRPTA)

The FIRPTA Weblog

International Tax Advisor – BUYER’S U.S. REAL PROPERTY (FIRPTA) WITHHOLDING TAX LIABILITY

 

[tags]FIRPTA, real estate tax liability, IRS[/tags]

Comments

  1. says

    Nice explanation and thanks Jay – I knew nothing about this and appreciate the clear explanation. This could easily bring about several problems.

  2. says

    It sounds like non citizens get better tax treatment. They pay no taxes under 300,000 but if i sold property and did not buy another one i would owe more than 10%. I am glad they atleast are trying to get some tax from this.

  3. says

    I had a Canadian buyer come in to our real estate office today and ask questions about buying here in the U.S. I found that I needed to do a little more research to help him answer some questions.

  4. says

    I had a Canadian buyer come in to our real estate office today and ask questions about buying here in the U.S. I found that I needed to do a little more research to help him answer some questions.

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