You have a what? A FIRPTA?
It may sound like some kind of fad child’s toy from the 90’s, but instead, FIRPTA is a little-known-about IRS requirement in real estate closing transactions that YOU need to know about as an agent or closing attorney.
FIRPTA is an acronym for Foreign Investment in Real Property Tax Act of 1980. It was a law passed to prevent foreign investors from buying property, selling the property and leaving the country without ever paying taxes on the gains. Because this would involve a foreign person, entity or trust not within the borders or the jurisdiction of the United States, the IRS might have no other mechanism to enforce the payment of taxes due on the gain. For this reason, the IRS leaves it to title agents and attorneys responsible for the closing to make a determination on the status of the seller, only for the burden then to be put on the buyer to withhold money to send to the IRS. That’s right, you read that correctly: the BUYER is responsible to withhold and send the money to the IRS. Here is the rundown on FIRPTA:
- FIRPTA is implicated only where the seller is a foreign “person”. The IRS defines “foreign person” to include a nonresident alien individual, foreign corporation, foreign partnership, foreign trust, foreign estate, and any other person or entity that is not a US person.
- Not all real estate transactions that involve a foreign seller implicate FIRPTA. There are a number of exceptions, such as when the transaction is for residential property of $300,000.00 or less. Familiarize yourself with these exceptions or have the list nearby in case the situation arises. https://www.irs.gov/individuals/international-taxpayers/exceptions-from-firpta-withholding (Exceptions from FIRPTA Withholding).
- If FIRPTA applies, the BUYER in a real estate transaction is required to withhold 15%-21% of the “amount realized” from the sale. The amount to withhold depends on the nature of the seller. The “amount realized” is most likely going to be the purchase price. These monies would come from the seller’s proceeds.
- If FIRPTA applies, the BUYER has 20 days from the date of sale to submit the required percentage along with certain forms required by the IRS.
Once you know how to recognize a potential FIRPTA situation, you need a game plan in place to handle it as smoothly as possible. It is obviously best to identify a FIRPTA situation ahead of closing. You can avoid a blow up at the closing table by implementing some of these practices:
- Ask for social security numbers at intake or well in advance of closing. If the seller has no social security number or tax ID number, determine if one of the exceptions applies and look deeper into whether this is a FIRPTA situation.
- Have the sellers sign a form upon intake attesting that they do not fall into a category that could implicate FIRPTA. If drafted correctly, this could serve as an exception to the reporting. According to the IRS website linked above, the buyer does not have to withhold and remit the percentage of the amount realized if:
The transferor gives you a certification stating, under penalties of perjury, that the transferor is not a foreign person and containing the transferor’s name, U.S. taxpayer identification number, and home address (or office address, in the case of an entity)….
The transferor can give the certification to a qualified substitute. The qualified substitute gives you a statement, under penalties of perjury, that the certification is in the possession of the qualified substitute. For this purpose, a qualified substitute is (a) the person (including any attorney or title company) responsible for closing the transaction, other than the transferor’s agent, and (b) the transferee’s agent.
This means that you, as the attorney or title agent, can serve as the “qualified substitute” and protect the buyer and the closing by having the sellers sign this before closing.
- In the event that you have a potential FIRPTA situation come up at the closing table, be prepared to provide direction to these buyers. Have a packet ready for the buyers with information directly from the IRS including the forms required by the IRS. More importantly, do you have a trusted CPA or tax advisor that could step in to answer questions? You do not want to provide tax advice if you are not qualified to do so. It’s best to refer the buyers to a tax professional to take over at this point.
For more information on FIRPTA and how to be prepared for a FIRPTA closing, visit the IRS website: