What Agents Need to Know About Closing Real Estate Transactions with a Foreign Seller

You may have heard of FIRPTA and wondered what is it and why is it important? FIRPTA, officially known as The Foreign Investment in Real Estate Property Tax Act of 1980, sets forth the IRS tax withholding and reporting obligations on the transferee (typically the buyer) of a U.S. real property interest when the transferor (typically the seller) is a foreign person or company. Under FIRPTA, foreign sellers are taxed similarly to U.S. real estate owners when selling their properties by placing the tax-remittance burden on the buyer. Whether you represent the seller or the buyer, it is very important to understand the obligations of each party.

Who Qualifies as a Foreign Person under FIRPTA?

A foreign person under FIRPTA is: (1) an individual that is not a U.S. citizen or a resident alien; (2) a foreign corporation that has not elected to be treated as a domestic corporation; or (3) a foreign partnership, trust, company or estate.

What are Buyer’s Obligations under FIRPTA?

When involved in a transaction with foreign persons, the buyer must withhold a certain percent of the amount realized (which is the sales or purchase price on the real property) from the transfer of the property. The buyer must report and pay to the IRS any tax withholdings within 20 days of closing.

Does the TREC Contract Address Working with a Foreign Seller?

Yes, Paragraph 20 of the standard TREC contract provides that if a seller is a foreign person, or if seller fails to deliver the Seller’s Affidavit of Non-Foreign Status or Certificate of Non-Foreign Status, then the buyer must withhold from the sales proceeds an amount sufficient to comply with applicable tax law and deliver the same amount to the IRS with the appropriate tax forms.

Can the Buyer Assign the Obligation to Withhold to the Title Company?

No. The IRS rules do not address whether the buyer may assign their responsibility to anyone else, including the title company or real estate agents. The escrow officer cannot provide legal or tax advice.

Are There any Situations Where the Buyer Does Not Have to Withhold?

If a foreign person is selling a U.S. real property interest, the appropriate tax must be withheld, unless there is an exemption from withholding. When working with a foreign person who is selling a U.S. real property interest, agents should encourage their clients to consult with an attorney or tax advisor who is well-versed in FIRPTA requirements and exemptions.

What is the Seller’s Affidavit of Non-Foreign Status?

The Seller’s Affidavit of Non-Foreign Status is a sworn statement completed and signed by the seller. It includes the seller’s tax identification number (usually the social security number for individuals and tax identification number for corporations) and a statement by the seller, under penalty of perjury, that he or she is not a foreign person as defined under FIRPTA. The seller must provide a completed and signed Seller’s Affidavit of Non-Foreign Status directly to the buyer.

What if the Transaction is from a Foreign Seller to a Foreign Buyer?

The same FIRPTA rules apply, and withholding is required.

What Happens if Buyer fails to Withhold the Tax?

A person who is required to deduct, withhold tax and turn in the forms/check to the IRS but fails to do so may be held liable for the payment of the tax as well as application penalties and interest.

What Should You Take Away from this Title Tip?

Listing Agents:
Confirm if your sellers are U.S. citizens when the listing agreement is signed.
Inform your escrow team immediately if you are working with a foreign seller.

Buyer’s Agents:
Confirm the citizenship status of the seller with the Listing Agent.
Inform your escrow team immediately if you are working with a foreign seller and if withholding applies, provide written instructions to the escrow team so we can withhold funds on the settlement statement and give the check to the buyer to remit to the IRS.
Inform your buyers that they will need to work with their CPA/financial advisor with FIRPTA experience to handle the required paperwork for withholding and the submittal of the withheld tax funds and tax forms to the IRS after closing.

This material is for information purposes only and does not constitute legal or tax advice. A complete understanding of FIRPTA is critical to the buyer’s tax withholding and reporting obligations. If the seller in your transaction is a foreign person, you should contact an attorney or tax advisor for assistance in determining obligations and requirements.