What is FIRPTA and when is it Applicable?
While we shy away from tax issues, they do intersect real estate law from time to time. One such intersection is FIRPTA – the Foreign Investment in Real Property Tax Act of 1980. When does FIRPTA apply to a transaction? What is the responsibility of the Seller? The Buyer? The Realtor(s)? The Title Company? Your Attorney? Your CPA?
FIRPTA might apply whenever the seller is a foreign person. The law allows the United States to tax foreign persons when they “dispose of” (transfer) a U.S. real property interest. FIRPTA might apply whenever real estate is sold, exchanged, liquidated, redeemed, gifted, transferred, etc., the definition of “disposed” under the Internal Revenue Code is broad.
Further, it is the responsibility of the transferee (the BUYER) to withhold the proper amount of tax, unless an exclusion applies. Why the buyer? As a foreign person, the seller may not be required to file tax returns, or may leave the U.S. to go home to his foreign country and be “untouchable” by the IRS. In most cases, the title company acts as the withholding agent on behalf of the Buyer. The title company will remit the tax withheld to the IRS and the Buyer can apply for a refund when he files his tax returns for that year, unless an exclusion or exception applies.
What are some exceptions to the FIRPTA withholding requirement? The most popular exclusion is when the buyer acquires the property for use as a residence and the sales price is less than $300,000. To qualify as a residence, the buyer or the buyer’s family must intend to reside at the property for at least 50% of the number of days the property is used by any person during each of the first two 12-month periods following the date of transfer. This is typically documented by an affidavit signed by the buyer.
In addition, the IRS will provide a withholding certificate that either excuses withholding or provides the amount to be withheld given the circumstances. Most people do not apply for this certificate because they don’t think to do so in time for closing.
Back to the roles of the different parties:
- Seller – must disclose if he is a foreign person such that FIRPTA might apply.
- Buyer – must withhold tax from the transaction unless an exclusion or withholding certificate from the IRS is available.
- Realtor – must disclose if they know that the seller is a foreign person such that FIRPTA might apply, and can connect the buyer and seller to an attorney or CPA that can help advise on responsibility under FIRPTA.
- Title Company – is the withholding agent (normally) for the buyer and can prepare an affidavit showing withholding is unnecessary, if applicable.
- Attorney – can help advise the buyer and seller of their rights under FIRPTA
- CPA – can help advise the buyer and seller of their rights under FIRPTA and/or help the parties or title company apply for a withholding certificate from the IRS.
Obviously, if FIRPTA might apply, you want to do your closing with a title company, backed by an attorney or CPA that can give you advise as to your rights and responsibilities under FIRPTA. If you do the closing on your own, and you are the Buyer, you may get a nice letter from the IRS requesting some additional tax following the purchase of your home!
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Shawn M. Yesner, Esq., is the host of the Crushing Debt Podcast and founder of Yesner Law, P.L., a Tampa-based boutique real estate and consumer law firm that helps clients eliminate the financial bullies in their lives. We assist clients with asset protection, the sale and purchase of real property, Chapter 7 liquidation, Chapter 13 reorganization, bankruptcy, foreclosure defense, debt settlement, landlord/tenant issues, short sales, and loan modifications in Tampa, Westchase, Odessa, Oldsmar, Palm Harbor, Clearwater, Pinellas Park, Largo, St. Petersburg, and throughout the greater Tampa Bay Area.