Understanding FIRPTA is a Must if You Invest in Property

There are so many things to be concerned with when purchasing a house: Did I get a good price? Will I be able to afford the mortgage? Will the home inspection find all of the problems? Are the schools good? Are the neighbors nice? And so on.

But one thing people likely never think about is: “Am I complying with FIRPTA regulations?” Well you should think about it, and here’s why: A buyer who does not follow FIRPTA regulations can end up having to pay the seller’s capital gains tax!

 

Yikes, You have my attention. Now tell me, what is FIRPTA?

FIRPTA stands for the “Foreign Investment in Real Property Tax Act” and has been the law since 1980. This law was designed to ensure that foreign persons pay taxes when selling or transferring property interests in the United States. The amount of tax owed depends on various factors, including who the seller is and the amount of profit realized from the transaction.

FIRPTA applies to any ownership interest held by a foreign person. The definition of property in the FIRPTA regulation is broad and includes but is not limited to: land, homes, buildings, trailers, natural products attached to the land,1)i.e. mineral rights and other personal property connected with real property. The tax can also apply to interests in corporations that own property, which must be looked at on a case by case basis.

Generally, it is not necessary to know too many details about whom you are buying a home or property from as long you have a good real estate agent working for you. However, for purposes of FIRPTA, you do need to know. This is because FIRPTA puts the burden on the person buying the home or property to comply with the laws even though the tax liability is placed on the seller.

As such, the buyer is required to withhold sufficient monies to pay the FIRPTA tax owed by the foreign seller. The buyer of any property that is owned by a foreign seller must withhold 10% of the sale price or the transfer value to have available for payment of the taxes. A good escrow company will assist buyers and their agents with the mechanics of setting aside the money prior to payment of the taxes on or after the closing of the sale.

 

When you may be exempted from FIRPTA

The withholding is almost always required for the purchaser of FIRPTA covered property with a few of the exceptions:

  1. When a buyer is purchasing a primary residence for less than $300,000.00;
  2. when a buyer receives written assurance from a seller that the seller is not a foreign person;
  3. when you receive certification from the seller that they are not making a profit on the sale; and
  4. you receive a letter from the IRS that you do not have to withhold.

Furthermore, there are several exceptions where a buyer does not have to withhold because the property being disposed of is an interest in a domestic corporation that meets certain qualifications.

If you, as a buyer, think that you are exempt from withholding, always make sure the seller certifies in writing the reason s/he they are exempt. And be diligent in protecting yourself and make sure that the exemption is correct and proper. If a buyer does not withhold taxes, and the taxes go unpaid, the buyer will have to pay the taxes owed on the sale. This is an awfully big price to pay for innocent buyer.

If you have any reason to believe the seller is being dishonest about their exempt status, you should withhold because if they do not pay the tax, you are again on the hook. No harm in being pleasantly surprised after the fact.

But, if there is any doubt about an exemption, it is best to get an attorney involved. Even real estate agents can be held liable if they know the claimed exemption is false and may be held to have to pay the taxes up to the amount of the commission earned on the transaction.

As always, tax regulations are lengthy and complicated. If you have questions about FIRPTA as a buyer, agent, or seller, Clear Counsel is here to help. Our lawyers will analyze the legal implications specific to your transactions and can recommend real estate agents and escrow companies that are best suited to your needs.

As always, we offer a free consultation.

Footnotes   [ + ]

1. i.e. mineral rights
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