Foreign Investment in Real Property Tax Act (FIRPTA)

Do you know why the following requirement is included in the TREC Contract?

Let’s look at what FIRPTA does
The Foreign Investment in Real Property Tax Act (FIRPTA), enacted in 1980, requires foreign persons to pay U.S. income tax on the gains they make from selling U.S. real estate.  

FIRPTA applies to the sale of property held by nonresident aliens and foreign corporations. 

FIRPTA also imposes a duty on the buyer in the transaction (not the title company) to deduct and withhold a portion of the sales price to send and report to the Internal Revenue Service.  

This means that ultimately the buyer in a transaction is responsible for (1) determining if their seller is a foreign person or entity subject to FIRPTA and (2) if they are, withholding those funds and remitting them to the IRS.  

Woah! How much is withheld?
The percentage to be collected at closing depends on the facts of the file and whether or not those facts satisfy the requirements above. To calculate the withholding amount, a real estate agent can use the following chart: 

Under Option A above the buyer must be buying the house to be their homestead property and they must be willing to sign an affidavit stating their intent.  

Under Option B the property is not the intended homestead for the buyer or the buyer is unwilling to sign the occupancy affidavit.  

Wait, so the buyer can determine how much withholding applies to a seller?
While it does not make a ton of sense, the IRS regulations base the withholding amount on the buyer’s occupancy and/or execution of the affidavit.  It’s a codified calculation that is used for closing and the percentage is taken from the sales price not the sales proceeds.  

Let’s look at an example: 
You have a sales price of $750,000 and the seller is a foreign person.  If the buyer is going to occupy the property and they will sign the affidavit, the withholding will be $75,000. If the transaction is not a homestead purchase for the buyer or if they will not sign the affidavit, then $112,500 will be withheld from the sale and sent to the IRS.

Ask yourself this question – would this calculation have been included in the seller net sheet prepared for the seller? If not, it’s a great reminder to ask your sellers if FIRPTA applies to them when you are taking the listing.    

Are there any 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. 

Personal Residence Exception
This has been discussed above.  If the buyer is occupying as their homestead and will sign the affidavit, withholding may be avoided as long as the sales price is under $1,000,000.  

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.  

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. 

Important Tips for a Real Estate Agent
Before listing property, find out if you have a FIRPTA seller.  Remember that FIRPTA applies to individuals and companies. An individual should have a social security number and a company should have a taxpayer identification number that they can provide to the title company.  Sometimes a foreign seller will register with the IRS to obtain a taxpayer identification number that looks like a social security number but it really is not.  A last minute surprise that withholding is required is not a great situation for a real estate agent, to have so the prudent agent will make sure their client supplies their social or TIN to Texas National Title early on in the transaction so that we can check the numbers. If your seller has a number that starts with a “9” (individual) or a “98” (companies) then you have a foreign seller that could be subject to withholding. You should ask your sellers these questions before preparing any net sheets as their net proceeds may be affected by FIRPTA.  

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