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What’s a FIRPTA?

by Hank Lerner, Esq. on

 

Update: As of Feb. 17, 2016, the rate for withholding has changed from 10 to 15 percent.

The Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) is a somewhat obscure law affecting certain real estate transactions.  Many practitioners wrongly believe it only affects commercial transactions but depending on your local market, residential transactions could be covered as well.

FIRPTA is designed to help make sure that foreign property sellers pay their fair share of taxes on real estate transactions.  It does this by mandating that in covered transactions, buyers must withhold 10 percent of the transaction value and remit that amount directly to the IRS.  If the seller’s tax liability is less than 10 percent they’ll get a refund but if it is more than 10 percent the IRS will now know of the transaction and will be able to track them down to get paid the remainder.

So what transactions does FIRPTA apply to and how do agents and brokers comply with it?

The easiest approach is to explain the primary exceptions in which FIRPTA doesn’t require withholding.  First, there is never withholding required in residential transactions with a sales price of less than $300,000.  So if you’re only involved in residential work you’ll only have to worry about FIRTPA unless you’re selling homes above that threshold.

Second, for residential properties over $300,000 and all non-residential transactions (regardless of value), there is no withholding requirement if sellers certify that they are non-foreign and supply their taxpayer identification number.  The easiest way to handle that is so ask them to provide an affidavit to that effect. View the FIRPTA Affidavit.

If you’re doing non-residential sales or high-end homes you should include the affidavit in your normal workflow for all transactions that might be affected.  Remember that this is part of the federal tax code, so you don’t want to expose yourself or your client to any attention (and possible penalties) from the IRS by failing to comply.  You’d also want to keep in mind that there is a specific provision of the law extending liability to the listing broker and/or buyer broker if either knows that an affidavit has been falsified.  Where either broker knows the seller is lying to avoid withholding, the broker could be liable for the withholding up to the amount of the fee that was collected.  In most affected transactions, that would probably wipe out your entire fee.

If FIRPTA withholding will be required, be sure to bring it to the attention of the closing company as early as possible.  In most cases the closing company should take care of the withholding and the filing of the appropriate IRS documents but since some may not deal with the issue all that often you’d want to be sure to give them enough notice to figure out what needs to be done.  If you or your client are unsure of how to handle FIRPTA issues, be sure to speak to your broker and/or brokerage counsel to be sure you’re complying with the law and recommend that your client seek assistance from a qualified accountant.

Topics

Transactions Property taxes Commercial Taxes FIRPTA Foreign investors IRS
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Comments (3)

Comments

  • Marge Zoto    February 13, 2012 | 8:54 pm

    What if the home is in a short sale and there is no money to withhold, but the home sells for way over $300,000, and the sellers are not citizens. What happens then. Is it best to find out if they are citizens and get the documentation before entering into an agreement, or just walk away from such a transaction if the sellers are not citizens?

    Should the lisiting agent get documentation from the sellers regarding their citizenship when they take the listing. This is helpful if they are not citizens and it will be a short sale.

    Reply to Marge Zoto
  • Hank Lerner, Esq.    February 14, 2012 | 10:18 am

    Marge: Interesting question on several levels. First, I’d disagree with the comment that “there is no money to withhold” in a short sale. The buyer is funding the purchase – either with cash or a money from a mortgage – and the law says the BUYER (not seller) has the responsibility to withhold 10% under FIRPTA. So if the transaction has a $400,000 purchase price, the buyer’s funds come into the transaction with the restriction that $40K has to be withheld from the seller and sent to the IRS. Or to put it another way, the IRS gets first dibs.

    The problem, of course, is that the original lender will now come out with $40K less than expected. In theory, this is something that the lender and the seller should deal with in advance. For example, if the lender knows that taxes must be withheld, they’d consider that as part of their calculations. Also, if there will not be any tax liability (and in other circumstances) the seller can get a non-withholding certificate from the IRS, which relieves the buyer of the requirement to withhold.

    As for documentation to the buyer or seller, this is a very sensitive subject you’d need to be careful with. For example, if your buyers instruct you to ask sellers about their nationality because they don’t want to be in a transaction with a foreigner it starts to look a lot like discrimination. If either agent wants that information in advance for the purpose of assessing possible FIRPTA liability – which is likely a legitimate reason – you’d do well to discuss with brokerage counsel how to do that in a non-discriminatory manner. For example, if you only ask that question of people who “look foreign” you’re setting yourself up for a lawsuit.

    Reply to Hank Lerner, Esq.
  • Rick Xander    February 16, 2012 | 9:51 am

    As I read Hank’s fine blog, this doesn’t sound like a problem until it’s a problem. And when it is, it’s a sword that cuts in many directions. There’s nothing on the residential Seller’s Disclosure that would clue a potential buyer that they could be responsible for escrowing an extra 10 percent (minimum $30,000). And as a listing agent, we can’t help the seller fill out the disclosure. If we ask about a seller’s nationality, that’s possible discrimination. And if we don’t ask, and a buyer could at the very least, lose a property they want, perhaps more in up-front costs, and if they some or all of the escrow, then I could foresee involment in possible litigation. Help!!!!

    Reply to Rick Xander

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