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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 interests held by nonresident aliens and foreign corporations in real property within the United States. FIRPTA 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.
The withholding amount used to be 10% but was increased in 2017 to be 15% of the sales price unless an exemption applies to the transaction. At closing 15% of the sales price must be withheld from the sales price and remitted to the IRS using special IRS forms unless the seller qualifies for an exception 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.
If the following conditions are met a “personal residence exception” exists and the withholding amount can be reduced or waived:
If the transaction qualifies based on the above criteria, the seller may have the withholding amount reduced or waived. 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:
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.
Also note that the Texas Real Estate Commission contracts require that the seller sign an affidavit to state that they are not a foreign seller. All sellers are required to sign this form at closing and Texas National Title prepares it as part of the closing package.
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 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.
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 numbers 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 an “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.
This Closer’s Corner is not intended to cover all of the options under FIRPTA so for more information please visit: https://www.irs.gov/individuals/international-taxpayers/firpta-withholdi...
The material contained herein is for informational and educational purposes only. It should not be used as a substitute for legal advice. If legal advice is required or desired, the services of a competent attorney should be sought. Except as noted or contained in any third party links, the contents of this document are the property of Texas National Title, Inc. Reproduction without prior written permission from Texas National Title is prohibited.