FIRPTA – A Tax on Home Seller’s that Home Buyer’s May be Liable For

FIRPTA has been around awhile but I ran up against it so many times in the past year that I’ve learned a lot more about it lately. The friendly folks at Pioneer Title were especially knowledgeable and helpful, explaining the finer points of the Foreign Investment in Real Property Tax Act… thanks guys!

So what is FIRPTA you ask? FIRPTA is a federal tax on foreign investors when they sell Real Estate here in the U.S., the short answer that prompted one of the questions I was asked most frequently, “Why does the U.S. government hold Home Buyers responsible for collecting this tax?” I can only venture a guess as I am not a legal or tax expert, that it is nearly impossible for the U.S. Government to hold foreign citizens accountable if taxes are not paid. Consequently Home Buyers, being the only other party to the contract, fall victim to the old ‘we know where to find you’ adage. There are exemptions to this tax and those are listed in the article below.

A Note to Home Buyers: Though the law states that you are responsible, your Title Company or Real Estate Attorney are tasked with attending to the details for you, in writing, within your closing documentation. You should notice the tax amount deducted from the Home Seller’s proceeds on the Settlement Statement. Keep this closing documentation since the government can request that you produce it in the future.

Though the following piece was originally intended to educate Real Estate Agents, the information is concise and I feel that it’s valuable to all home buyers and to non-U.S. home sellers as well.

An Agent’s Guide to FIRPTA

By Barbara Pronin

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. Reprinted with permission from RISMedia. ©2017. All rights reserved.

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Bill Salvatore / Arizona Elite Properties
Residential Sales, Marketing, and Property Management

More Resources for Home Sellers and Home Buyers

Our Buyer’s FAQ page has 9 of the most frequently asked questions from Home Buyers, along with 10 additional resources for Home Buyers at the bottom of the page.

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Thinking of Selling your home? First check out our 9 FAQs for Sellers. Then read on, there are 9 additional resources for Home Sellers at the bottom of the page.

Home Buyer’s Frequently Asked Questions

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