The Tax Act For Foreign Investors
FIRPTA stands for “Foreign Investment in Real Property Tax Act” and became law in 1980. This Federal Law protects the U.S. Government’s interest in collecting taxes owed from real estate transactions that involve Foreign Sellers.
Why You Should Care
All Home Buyer’s in the U.S. should consider this law important because there are so many foreign investors who own property in this country now. On homes bought/sold that are over $300,000, this tax needs to be withheld if the seller is a Foreign National. If the seller is not aware of this law until the title or escrow company tells him, he’ll probably want to apply for the exclusion. The IRS waiver takes 30-45 days to approve.
What this means to you:
1. The withholding amount is 15%of the SALES PRICE- so a minimum of $45,000. Most people don’t want this money tied up for months to a year so they’ll want to apply for the exclusion. This probably means your moving into the home will be held for the same 30-45 days that approval takes.
2. If YOU don’t see a signed affidavit or a waiver by the IRS and they don’t pay this tax, you might. FIRPTA states that the BUYER is the responsible party for payment of this tax to the IRS! Since taxes are not normally part of a Realtor’s job, we learned about FIRPTA so we can protect you. I hope that most Realtors know about FIRPTA, however, since we sold Real Estate in Las Vegas for 15 years before learning this law, I wouldn’t count on your Realtor knowing this.
You bought your house two years ago. You never met or saw Mr. Seller, so of course you never even thought about what Mr. Seller’s nationality was. His name is David Smith and Mr. Seller Smith was from Australia. A few months after you got your house Mr. Smith moved the family back to Australia. The title company did not do a FIRPTA withhold from Mr. Smith’s proceeds and he did not file the FIRPTA form or get an exclusion. Now the IRS wants their tax money and YOU, THE BUYER, WOULD OWE IT!
According to FIRPTA, if the seller is a Foreign Person, the buyer is responsible to have up to 15% of the SALES PRICE withheld at the close of escrow as a tax. If you are a Foreign Person Seller, you need to consult a tax expert. You may qualify for an exclusion. Exclusions can take 30 or more days so plan ahead!
You may also want to read our FIRPTA for the Home Seller blog.
What Happens If The Tax Is Not Withheld
Since the law makes the tax the buyer’s responsibility, the IRS could and has come after the buyer for payment. Because of this possibility, it is important for a buyer to ask questions and have an experienced agent representing them. Do yourself a favor and read 4 Reasons To AVOID FSBOs!
FIRPTA’s Foreign Person Definition
According to Wikipedia, Foreign persons include individuals who are not U.S. citizens or resident aliens, corporations organized outside the United States, and nonresident estates and trusts. See 26 USC 7701. Note that partners, not partnerships, are subject to tax, so foreign status is determined at the partner level. However, see withholding tax for an overview of exceptions regarding foreign partnerships.
WHEN MULTIPLE CITIZENSHIPS OWN A PROPERTY:
What happens when 2 or more people own the house and one owner is a Foreign Person? If the others are U.S. Citizens, the IRS has actually used common sense about this! The answer is that the percentage withheld is based on the percentage of ownership that the Foreign Person owns.
Consult An Attorney
FIRPTA is a complicated law, and our blog only scratches the surface. If you are selling your home and think FIRPTA affects you, text or call for an appointment with us. You should also consult an accountant and/or an attorney familiar with the law.
Blog Written By Kurt Grosse. Kurt is a Top-Producing 24+ Year Realtor in Las Vegas, Nevada. His skills as a retired Nevada structural engineer make him the best and most unique Realtor in town. When you buy a new construction property he Monitors the Construction until the drywall is up sending you pictures. For pre-owned homes, we look for and show you any defects and flaws that we find on the floor, walls or ceilings. Protect yourself by having Kurt and Terri protect you FREE OF CHARGE!
Search Pre-Owned Homes and Communities- Areas of Town