When is FIRPTA Applicable? 

Who is responsible for FIRPTA withholding?

The IRS rules place the responsibility for withholding potential income tax due in the amount of 10% or 15% of the purchase price on the buyer of the real property from a foreign entity. The real property becomes the security for the IRS to ensure that they receive taxes that are due. If the payment is not made by the buyer, the IRS can seize the real property (or other assets of the buyer).

When is a Seller exempt from the FIRPTA withholding?

  • When the sales price is not more than $300,000 and the buyer or a buyer’s family member plans to reside in the property
  • The Seller provides a certificate stating that he or she are not a foreign seller (e.g. they are a US Citizen or legal resident alien).
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  • The Seller may apply for and receive a withholding certificate prior to close of escrow from IRS to excuse withholding or reduce withholding.

Can the buyer assign the responsibility for withholding to the settlement or escrow agent?

There are no provisions in the IRS rules for the buyer(s) to assign their responsibility to anyone else, including the title company or real estate agents. The title company/escrow agent cannot provide legal or tax advice.

Is the buyer protected if he or she did not know the seller was foreign and the buyer plans to use the property as his or her primary residence and the purchase price is over $300,000?

The buyer is only protected if the 10% or 15% is withheld or the seller signed a non-foreign affidavit.

 

The seller and buyer do not want to engage a CPA to answer their questions. Can the real estate agent or escrow contact help with FIRPTA questions?

Escrow personnel and real estate agents may have experience with FIRPTA, but are not qualified to provide advice on individual taxpayer’s situations.

*Please note this content is general information only and should not be relied upon for tax, legal or accounting advice. You should always consult your own tax, legal and accounting advisors before engaging in any transaction.

 

 

 

 

Your FIRPTA obligations as a buyer, seller or realtor

If a buyer is purchasing a property from a foreign person or entity and FIRPTA applies, the buyer is required to complete the required forms (8288 and 8288-A) and submit the applicable withholding amount to the Internal Revenue Service. The buyer’s agent, title company or lender is not responsible for doing this. We recommend that buyers have their lawyer or tax advisor assist with preparing these forms.

Buyer’s agents should take care to discern the residency status of the seller to determine whether FIRPTA applies. Most standard sale contracts include a clause where the seller must confirm if FIRPTA applies or not. If it does apply, the buyer and their agent can work with the seller and their agent to establish what needs to be withheld. It may also be reasonable to ask the seller to cover the buyer’s costs related to the tax filing & withholding (such as tax advisor fees).This amount can be placed into escrow with the title company until closing, or a check can be cut at closing to be submitted with the IRS filings. In cases where the seller did not disclose their foreign residency or entity status up-front, the buyer’s agent may wish to request additional funds from the seller to account for their buyer’s FIRPTA obligations and expenses.

Seller’s agents representing a “foreign person” under FIRPTA should disclose the seller’s foreign residency status both in their listing and in the special agreements section of the contract. They may also consider offering to cover the buyer’s costs relating to filing the IRS forms and withholding. The best practice for seller’s agents, however, is to have their client retain a CPA and file Form 8288-B prior to closing. This can be provided to the buyer to help reduce or even eliminate FIRPTA withholding requirements.

 

 

Because your title company is in charge of escrow and closing contracts, it’s vital that agents disclose a seller’s foreign person or entity status to the title company as soon as it becomes known. The title company will also need to know the amount that will be withheld from the seller’s proceeds and any other adjustments that will need to be made on the closing statement. Finally, let your title company know whether the FIRPTA funds will be held in escrow after closing, or whether a check will be cut at closing to be submitted to the IRS by the buyer. To learn more, we’ve created a document to explain the process.

True Title is here to help ensure that your transaction moves smoothly while adhering to all current obligations and regulations. If you have questions about FIRPTA as it applies to your deal or client, we recommend engaging with a tax professional or legal advisor, and can point you in the direction of recommended professionals if needed. For a recommendation, or to engage us as your title company on your next transaction, get in touch today.