How Does FIRPTA Affect Buyers in a Real Estate Transaction?

In a previous closer’s corner we talked about FIRPTA and it’s affect on the transaction: Foreign Investment in Real Property Tax Act (FIRPTA) | Texas National Title

FIRPTA, which stands for Foreign Investment in Real Property Tax Act, affects a buyer by imposing certain withholding and reporting requirements when the seller of a US real property interest is a foreign person or entity.

Under FIRPTA, when a buyer purchases real estate from a foreign seller, the buyer is required to withhold a percentage of the sales price and remit it to the Internal Revenue Service (IRS). The withholding percentage is generally 15% of the sales price, although it can be lower under certain circumstances, such as when the sales price is below a specific threshold.

Interestingly enough, the IRS regulations make the buyer responsible for determining whether the seller is a foreign person and conducting due diligence to comply with FIRPTA requirements. 

How does a buyer know if the seller is foreign? 
In general, the buyer will not know which is why there is a provision in the TREC contract that addresses foreign sellers: 

As part of the closing process the seller is supposed to sign a sworn affidavit to confirm that they are not a foreign seller.  This is most commonly called the Non-Foreign Affidavit and the title company should be obtaining this through the closing process.  

What happens if the seller is foreign though? 
This next piece gets a little tougher and here’s where it can get tricky.    

Keep in mind that under FIRPTA it is the buyer that is technically responsible for requiring the withholding, completing all necessary paperwork, and remitting the appropriate funds to the IRS.  They only have twenty days from closing to do this. 

Some title companies push this process on the buyer without properly notifying them that there are required steps.  Instead, they will just have the buyer and seller sign a disclosure saying all FIRPTA tasks are being handled outside of closing. This ultimately pushes all of the process off to the buyer and can leave them completely responsible for all necessary steps post-closing

At Texas National Title we help guide the parties through the FIRPTA process instead.  While we are not able to provide advice on the legal obligations involved, or the tax ramification of non-compliance, we do help educate the clients on the tasks that need to be completed, we help with the required paperwork and we put the payment on the closing statement to be sent to the IRS from our closing transaction instead of the parties handling it outside of closing.  We’ve found that historically the clients need some support from their escrow team to make sure this process is handled properly and we are here to help.    

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