Foreign Investment In Real Property Tax Act (FIRPTA)
This is not tax advice. For tax advice, consult a tax professional — not a blog!!!
FIRPTA Explained.
The Foreign Investment in Real Property Tax Act (better known as FIRPTA) is a federal law that imposes a tax on “foreign” sellers of real estate located in this country. The tax is generally 15% of the sale price.
Through escrow and the closing agent, the sale process does a good job of making sure every buyer and seller comply with this law. But it is always a good idea to appreciate and understand any tax obligation. This is particularly true for buyers, because they can be left holding the bag.
FIRPTA is a tax on sellers…
In the United States, anyone, including foreigners, can purchase and own real estate. Other countries, like Mexico, are more complicated. However, foreign owners here aren’t exactly treated equally, either. In the U.S., an additional tax is imposed on a foreign owner when they sell their real property. FIRPTA became law in 1980.
…paid by buyers?
The law requires the buyer to determine whether the seller is a “foreign person.” That term has a unique meaning in FIRPTA, and essentially means a non-resident foreign person, or a foreign legal entity. If the seller is a “foreign person,” then the buyer is responsible for withholding the tax due, and forwarding it to the IRS. If the buyer fails to do so… then the buyer owes the tax! Ouch!!!
Escrow takes care of the details.
Part of the law allows for the closing agent to make sure the required paperwork is signed and completed. If the seller does owe the tax, the closing agent can collect it at closing and forward it to the IRS on the buyer’s behalf. And that is exactly what routinely happens.
But not without a little kerfuffle! These days, most escrow instructions say that the closing agent won’t do anything about FIRPTA. Which would actually be a giant problem, because it could be hard for a buyer to determine whether the seller was a “foreign person.” And then sending 15% of the money to the IRS? What if the seller disagrees? What a mess!
Thankfully, any good form contract (including the NWMLS version, and the FSBOLawyers.org version) includes a FIRPTA term. As set forth in our contract:
FIRPTA requires a buyer of real property to determine whether the seller is a “foreign person” (essentially a non-resident foreigner or foreign entity). If Seller is a foreign person, then Buyer may be responsible for withholding the tax due.
SELLER CERTIFICATION. Seller certifies and warrants the following (each Seller must INITIAL ONE):
____ I AM NOT / ____ I AM a foreign person or entity.
____ I AM NOT / ____ I AM a foreign person or entity.
If Seller is not a foreign person or entity, then Seller will execute and deliver to Closing Agent before Closing a FIRPTA Certification confirming Seller’s non-foreign status. If Seller is a foreign person or entity, and this transaction is not otherwise exempt from FIRPTA, then Closing Agent will ensure compliance, including withholding and paying the required amount due the Internal Revenue Service.
The NWMLS contract has similar language. And the law is clear: If there is a conflict between a contract and the escrow instructions, the contract prevails. So, as long as the contract includes a FIRPTA term, the closing agent is responsible for making sure the term is satisfied.
You may need a FIRPTA Certification.
Due to a conflict in federal and state regulations over who is qualified to prepare legal and tax documents, some closing agents are unwilling to prepare the FIRPTA Certification that is required from a seller. As a result, good form contracts impose on the seller the obligation to provide the certificate to the closing agent. NWMLS Form 22E FIRPTA Certification can be used for this purpose, as can our FSBOLawyers.org version.
However, many closing agents are willing to take care of it, notwithstanding their escrow instructions to the contrary. In any event, the closing agent has a separate obligation to record the seller’s social security number, and report the sale. If the seller doesn’t have a social security number, then the seller is likely a “foreign person.”
At that point, the closing agent cannot “miss it.” It is difficult for this issue to “slip through the cracks” such that the buyer ends up owing the IRS.
But like the Romans said, “Buyer beware!”
