The Foreign Investment in Real Estate Property Tax (FIRPTA) was enacted to ensure that the U.S. government could collect capital gain tax on the profits realized by foreign sellers (not a U.S. citizen or a resident alien with a green card ) of real property. How do they do this? By making the buyer (including a foreign buyer) responsible for the payment. If the buyers fail to withhold, they may be responsible for paying the tax out of their own pockets. The closing agent will withhold the appropriate amount of funds from the seller’s proceeds and transfer that amount into the buyer’s designated escrow account. The withheld money must be forwarded from the escrow account to the IRS within 20 days after closing.
The basic rules for withholding are as follows:
- If the purchase price is less than $300,000 and the buyer or family member intends to live in the property most of the time over the next two years, no withholding is necessary.
- However, even though no money is withheld in the above situation, the buyer is still responsible for paying the tax and penalties if the seller doesn't pay their capital gain tax. The IRS can collect cash from a buyer or place a lien on the purchased property.
- Generally, 15% of the proceeds are withheld for purchases greater than $300,000
A seller can possibly avoid withdrawals if they file for a Withholding Certificate. The paperwork must be completed and approval granted before closing. The certificate can lessen or eliminate the need for withholding under the following circumstances:
- If the amount of withholding exceeds the maximum capital gains tax liability, the seller can request a lesser percentage of the proceeds to be withheld.
- If the seller loses money on the sale, they can submit a request for a Withholding Certificate.
Realtors must be careful to disclose a foreign seller in the MLS listing and will frequently attach a seller-initialed FIRPTA Addendum to the listing. The buyers must then initial this form and return it to the listing agent. We have many foreign sellers here in South Florida. Be careful and proceed with caution.
For more information, contact a CPA or real estate attorney.