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The Foreign Investment in Real Property Tax Act (FIRPTA)

The issue of FIRPTA tax on “foreign” Sellers has become much more common in our marketplace than in the past. What is it?  The Foreign Investment in Real Property Tax Act (“FIRPTA”) was passed by Congress in 1980, and is found in the Internal Revenue Code.

Quoting from the IRS website, “The disposition of a U.S. real property interest by a foreign person (the transferor) is subject to the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) income tax withholding. FIRPTA authorized the United States to tax foreign persons on dispositions of U.S. real property interests.”

In other words, when a “foreign person”, as defined by the Code, sells real estate in the United States, the foreign Seller may be subject to withholding tax of 10% to 15% of the sales price of the property, depending upon the sales price and the Buyer’s use of the property.  And under the Code, it is the Buyer’s responsibility to withhold the tax from the Seller’s proceeds, and pay the tax to the IRS.  Failure to pay the tax when due can subject the Buyer to the tax, and any penalties and interest that may have accrued.

Paragraph 20 of the TREC contract has been in the contract for quite some time, and states,

20. FEDERAL TAX REQUIREMENTS: If Seller is a "foreign person,” as defined by Internal Revenue Code and its regulations, or if Seller fails to deliver an affidavit or a certificate of non-foreign status to Buyer that Seller is not a "foreign person,” then Buyer shall withhold from the sales proceeds an amount sufficient to comply with applicable tax law and deliver the same to the Internal Revenue Service together with appropriate tax forms. Internal Revenue Service regulations require filing written reports if currency in excess of specified amounts is received in the transaction.

A “foreign person” is a person who is not a U.S. citizen, and a person who is not a permanent resident alien with a green card.  There are some exceptions, but proving these exceptions require the assistance of a CPA, tax attorney and the IRS.

 

The contents of this blog post are intended to convey general information and not to provide legal advice or opinions.