Foreign Real Estate Investors and FIRPTA

Any foreign real estate investor, whether they are buying or selling property in the United States, should be familiar with the Foreign Investment in Real Property Tax act of 1980.

This Internal Revenue Service tax law requires a foreign real estate seller to inform the buyer of their non-residency status so that the buyer can withhold 10% of the property sale cost and remit it to the IRS. Although the foreign real estate seller technically is paying the tax, it is the buyer’s responsibility to make sure the funds are paid to the IRS. If the buyer does not withhold the funds and remit it to the IRS, they could become responsible for paying the tax. This is why it’s so important for both buyers and sellers to be familiar with FIRPTA, even if you are not a foreign real estate investor. You never know when you may find yourself purchasing property from a foreign real estate seller.

Who is affected by FIRPTA?

Any person or corporation deemed to be a “foreign person” who sells real property in the United States may be affected by FIRPTA.

In general, a seller is considered a “foreign person” under FIRPTA if they are:

• A nonresident alien individual,
• A foreign corporation, not treated as a domestic corporation, or
• A foreign partnership, trust or estate.

Resident U.S. aliens are not considered foreign persons under FIRPTA.

There are a few instances where the foreign real estate seller may be exempt from FIRPTA. If the buyer intends to use the property as his or her primary residence and the property sells for less than $300,000 FIRPTA does not apply and the 10% does not need to be withheld.

The Reasoning Behind FIRPTA

FIRPTA ensures that real estate taxes are paid on U.S. property that is sold by a foreign real estate seller. In the past, it was possible for foreign real estate investors to purchase property in the United States, realize a profit on the sale but not pay anything in taxes. This was advantageous to foreign real estate sellers, but not to legal U.S. residents. FIRPTA corrected this inconsistency.

The funds that are withheld at closing serve as a form of deposit for the seller’s property tax liability. These funds are required to be paid to the IRS shortly after the property closing takes place. Most individuals can expect to pay 10% of the sale price of the property; however, if the seller is a foreign corporation the percentage increases to 35% of the gain realized on the sale.

Complying with FIRPTA

In most cases, the buyer and his or her agents will be informed ahead of time that the seller is a foreign real estate investor. The realtor and title agency will then know that FIRPTA has come in to play and can take steps to withhold 10% of the sale price. If the title agency is also acting as escrow agent, they can make sure the correct forms and paperwork are in order. The escrow agent will also likely withhold the required funds and remit them to the IRS on behalf of the buyer.

It is in the best interest of the title agency and realtor to make sure FIRPTA is complied with. Like the buyer, if it is later discovered that FIRPTA requirements were not met, the buyer, realtor and title agent may all be held liable for the 10% due.

Title Junction is a full service real estate title company serving the area of Fort Myers, Cape Coral and the entire state of Florida since 2005. The company handles a number of real estate title services for both commercial and residential properties. Employees of Title Junction can also act as a witness in courtesy closings as well as an escrow agent or a notary public.

Please contact Jennifer Ferri of Title Junction, LLC for further information @ 239-415-6574 or www.title-junction.com