Why Realtors with Foreign Sellers Should Hire an Expert in FIRPTA Transactions

With the passage of the Foreign Investment in Real Property Transfer Act (FIRPTA) in 1980, foreign nationals who sell, gift, or otherwise transfer their U.S. properties must nearly always have up to 15% of the gross sales price withheld and sent to the IRS. Moreover, because the IRS holds the buyer responsible for withholding these proceeds and remitting them to the IRS, FIRPTA transactions can seem onerous to both parties involved. No matter which party in the closing you represent, you owe it to your clients to hire title and real estate experts with deep knowledge and experience in FIRPTA compliance.

FIRPTA 101

Under FIRPTA, anyone purchasing or receiving a U.S. property from a foreign individual or entity must retain a certain percentage of the sale funds to be collected as a tax withholding. (Note that sellers who are legal permanent residents—or who can prove that they meet the substantial presence test—are not subject to FIRPTA. The IRS provides a guide to this test on its website: www.irs.gov/individuals/international-taxpayers/substantial-presence-test.

Thus, the buyer must determine if the transaction falls under the scope of FIRPTA, since failure to do so could leave the buyer liable for the uncollected tax. That is why the buyer’s attorney will often draft a “Non-Foreign Affidavit” for the seller to sign wherein they swear under penalties of perjury that they are a U.S. citizen or legal resident. The affidavit will usually require that they provide their social security number (SSN) or employer identification number (EIN) as well.

How Much Needs to be Withheld?

Generally, the withhold amount is 15 percent of the gross sales price. The closing agent will typically be the one to send the withheld funds to the IRS (the deadline to send the funds is within 20 days of the closing date). The seller must then file a tax return to determine the actual amount of the gain (or loss) and seek a refund for the difference. The tax return is generally filed the year after the sale takes place. In some cases, a lower rate of 10 percent will apply if the sales price is between $300,000 and $1 million and the buyer or the buyer’s immediate family plans to use the property as a personal residence (the buyer must also sign an affidavit attesting to these facts). If the sales price is $300,000 or lower and the property is being purchased for the purpose of being used as a personal residence, the transaction may be totally exempt from FIRPTA (again, in this situation, the buyer signs an affidavit attesting to the facts surrounding the transaction). You can learn about other exceptions to FIRPTA by visiting the IRS’ website here.

What is a Withholding Certificate?

In certain cases where a foreign seller is selling the property for a loss or minimal gain and he or she does not want to wait until the following year to file a tax return to receive the funds back, the seller can complete a Form 8288-B, also known as the FIRPTA Withholding Certificate, and submit it to the IRS on or before the closing date. The 8288-B must be accompanied by supporting documentation outlining the details of the seller’s initial purchase of the property, as well as the re-sale. If is the 8288-B package is not sent to the IRS by the time the transaction closes, then the filing will be considered untimely and the funds must be transferred to the IRS within 20 days after closing. If the 8288-B Withholding Certificate package is submitted no later than the date of the closing, the withheld funds may be held in escrow until the certificate is accepted by the IRS. Once the IRS issues the Withholding Certificate, the amount authorized by the IRS can be returned to the seller.

Why Every Realtor Should Partner with an Expert in FIRPTA Transactions

In a real estate market as globally popular as Florida’s, the chances of encountering a FIRPTA transaction are high. No matter which side of the transaction you represent, you and your clients will be better served by working with the FIRPTA specialists of Marina Title.  We make it our business to know every relevant law and regulation regarding real estate transactions, including FIRPTA. We can take the necessary precautions, prepare all the relevant paperwork and legal instruments, and fulfill the other legal obligations for your transaction.

To lean more, call (305) 901-5628 or email [email protected].