What is FIRPTA, you ask? FIRPTA is the abbreviation used for the Foreign Investment in Real Property Tax Act of 1980. Although adopted in 1980, withholding rules were not adopted until July of 1984, and those rules can have a significant impact on your life. The government has not forgotten FIRPTA, having amended it on November 3, 2003.
The Act requires that where a foreign person sells United States real property, the Purchaser is required to withhold and forward to the Internal Revenue Service a sum equal to ten percent (10%) of the sales price. You may say, “Gee, that is a shame for buyers when they buy from a foreign person.” However, the seller’s agent is also responsible, and a definition of agent clearly includes a real estate agent.
The Act specifically indicates that the agent will not be responsible for more than the amount of his commission, but a number of authors have indicated that failure of the agent to cover this problem can result in the broker’s civil liability to the Purchaser, and so you may end up being responsible for the entire ten percent (10%) of the purchase price.
What do I do, you ask. First of all, you do not have to worry about the Act if the property is being acquired by the Purchaser for use as his own residence, and the sales price does not exceed $300,000. Secondly, you are exempt if the seller furnishes an Affidavit that it is not a foreign person. If you look at most title companies’ Affidavit forms it specifically requires an Affidavit that the individual is a citizen of the United States. However, I think it is incumbent upon you to make sure that you advise the seller of that language and not just say “here, sign this Affidavit.”
The proper form for sending the money to the Internal Revenue Service is a Withholding Tax Return (Form 8288). The IRS will not process the return unless the foreign person has a taxpayer identification number (TIN). If you are involved in the transaction it would be important for you to advise the foreign national to acquire a TIN prior to settlement. The Act goes on to discuss notice of non-recognition transfer where there is not gain, and Section 1031 exchanges and other items which may come into play.
Click the link below to open this alert in pdf format, as well as to view a sample seller’s certificate. If you have any questions don’t hesitate to contact me at 215-661-0400 or EMullin@HRMML.com.