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.