Foreign Investment in Real Property Tax Act (FIRPTA)
What da heck is a FIRPTA? Well you may be shocked when you find out..
If you see any properties on the MLS that says or includes 'Seller is a foreign individual" or "Selling individual is of foreign status", that may indicate that FIRPTA applies here and you have to be cautious with your Buyers wanting to purchase these homes.
Read below for a better explanation, but from Realtor to Realtor what it means is essentially this: In the event the Buyer purchases a home from a foreign individual and certain exemptions do not apply, the BUYER, yes.. the Buyer, holds back (withholds) 10-15% in invisible money essentially, and then has to file tax forms to release it to the IRS, and eventually the Seller once they file their own forms. In the event the Buyer does not file these forms, they can be liable for the withholding amount, even though they have nothing to do with the Sellers taxes or tax situation. While its my opinion this is ass-backwards, what this does is prevent foreign sellers from selling a house and then just 'fleeing the Country' without paying any taxes on the capital gains. So now its the Buyers problem to deal with in the event that happens.
Under FIRPTA, the buyer does not actually hold the money indefinitely but rather acts as a withholding agent. The buyer or the buyer's agent is responsible for withholding the specified percentage (typically 10-15%) of the gross sales price from the proceeds due to the foreign seller at the time of the transaction.
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The buyer then remits this withheld amount to the IRS. This withholding acts as a security to ensure that the foreign seller's U.S. tax obligations related to the sale are met. The withheld funds are sent to the IRS using specific forms, such as Form 8288 ("U.S. Withholding Tax Return for Dispositions by Foreign Persons of U.S. Real Property Interests") and Form 8288-A ("Statement of Withholding on Dispositions by Foreign Persons of U.S. Real Property Interests").
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Here is a simplified outline of the process:
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1. Withholding at Closing: At the time of closing, the buyer withholds the required 10-15% from the amount due to the foreign seller. This has nothing to do with the sales price, cash-to-close or anything truly related to the transaction numbers wise.
2. Submitting to the IRS: The withheld amount must be sent to the IRS, generally within 20 days of the property transfer. This is done by the Buyer utilizing Form 8288 and Form 8288-A and sending it to the IRS.
3. Receipts and Confirmations: The IRS processes the forms and withholding payment. The foreign seller can later claim a tax refund if their actual tax liability is less than the amount withheld, by filing a U.S. tax return and attaching Form 8288-A as proof of withholding.
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The responsibility for withholding and remitting the money primarily lies with the buyer or the buyer's representative, and failing to comply with FIRPTA requirements can result in the buyer being held liable for the tax that should have been withheld, plus potential penalties and interest.
What are the exceptions to withholding?
While there are several exceptions to withholding, only two are commonly relied upon for a traditional resale transaction. In general when we have a transaction that falls under FIRPTA the presumption is that the withholding needs to be done through closing. The responsibility then falls to the seller to “qualify” for the exception.
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1) Personal Residence Exception ** OnDemand Realty Does NOT recommend this**
If the buyer is occupying as their homestead and will sign the disclosure affidavit, withholding may be avoided as long as the sales price is under $1,000,000.
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Something important for a real estate agent to understand is that the responsibility and liability to the IRS rests on the buyer. This responsibility does not rest with the title company. For that reason, the buyer is not required to sign the FIRPTA disclosure even if the facts otherwise meet the test for an exemption. Getting the buyer comfortable with signing the disclosure is something the seller (or their agent) has to negotiate with the buyer and their agent. When doing so it is important that a listing agent never make statements of fact or say anything that could be construed as tax or legal advice. It is also important to note that if the buyer signs the disclosure at closing but then later fails to occupy the property for the required timeline they could become responsible to the IRS for the withholding amount, plus interest and penalties. When acting as a buyer’s agent, a real estate agent should make sure their client is advised to seek counsel or advice from their accountant if they have questions.
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2) Withholding Certificate Exception
The amount that must be withheld from the disposition of a U.S. real property interest may be reduced or waived by the seller obtaining a withholding certificate issued from the IRS. This requires the seller to submit to the IRS for the certificate and in general these requests receive a response from the IRS within 90-120 days after receipt of a complete application including the Taxpayer Identification Numbers (TINs). If a real estate agent has a client that wants to use this option they need to have the seller start working on this well before they go under contract unless you have sufficient time in the close date to allow for working with the IRS.
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For more information, please visit https://www.firptasolutions.com/