FIRPTA: What Is It and Why Should You Care?

By: Brett M. Woodburn, Esq.

Did you know homebuyers are responsible for ensuring that the IRS collects at least 15 percent of the sale price of real estate when the seller is not a U.S. tax resident?

The Foreign Investment in Real Property Tax Act of 1980 is found in the Internal Revenue Code and authorizes the U.S. to tax foreign individuals who are selling U.S. real estate. Specifically, FIRPTA provides "Except as otherwise provided in this section, in the case of any disposition of a U. S. real property interest ... by a foreign person, the transferee shall be required to deduct and withhold a tax equal to 15 percent of the amount realized in the disposition." 26 U.S.C. §1445(a).

Being a U.S. tax resident is separate and distinct from one's immigration status. U.S. citizens are considered to be U.S. tax residents as well. Similarly, permanent resident aliens (i.e., green card holders) are also considered to be U.S. tax citizens. The third way an individual can be considered a U.S. tax citizen is if they satisfy the "substantial presence" test. Satisfying this test is somewhat complex, to summarize, the individual must have been in the U.S. for 31 days during the current year, and 183 days during a three-year period including the current year and two immediate years prior.

How and when does FIRPTA apply?

The general rule is FIRPTA applies in all transactions in which the seller is a foreign person (meaning not a U.S. tax resident). There are several exemptions to the general rule, some of which apply to individuals and others that apply to business entities. Looking at the exemptions benefitting individuals, if the seller provides a non-foreign affidavit, which is a statement under oath in which the seller provides the taxpayer identification number and attests that the seller is not a foreign person, then there is no obligation for the buyer to withhold money. The obligation to withhold money is absolved if the buyer receives a qualifying statement from the Secretary of the U.S. Department of Treasury that satisfies certain criteria. The buyer's obligation to withhold 15 percent from the amount realized does not apply if the buyer is purchasing the property as a primary residence and has paid less than $300,000.00.

Understand that FIRPTA is an issue for both buyers' and sellers' agents. As noted above, the buyer (or transferee) is charged with the responsibility of withholding 15 percent of the amount realized in the sale. However, if the buyer failed to withhold the requisite percentage because the sellers' agent (including attorneys), the buyers' agent (including attorneys) or the settlement company (including attorneys) knowingly failed to notify the buyer that the seller was a foreign investor, then the obligation to withhold the 15 percent of the amount realized in the sale may fall to the sellers' agent, buyers' agent and/or title agent to withhold the required amount. Fortunately for the various agents and attorneys involved, liability is limited to the amount of compensation that the agent earned in the transaction. For listing brokers, remember that the amount of compensation you earn is established by the listing contract (see Paragraph 5 of the PAR Listing Contract). The amount of compensation is the gross fee identified in your listing contract, i.e., listing percentages before a cooperating fee is paid plus any flat fee charged by the broker. Having to pay this fee would not absolve the listing broker of paying the cooperating fee. The buyers' broker's liability when there is a failure to withhold a FIRPTA percentage in the amount of the cooperating fee received, any flat fee paid by the buyer, and any other source of income derived as part of the transaction. Title agents may be responsible for the gross fee collected after the title insurance company is paid its premium.

It is important to understand how and when this liability can be imposed on the agents and attorneys involved in the transaction. If the seller furnishes an affidavit of non-foreign status and any of the agents involved in the transaction knows that the affidavit is false, and that agent or agents fail to notify the buyer that the information is false, then agent liability is triggered. Before breathing a sigh of relief, examine the obligations under FIRPTA:

  1. Buyer must deduct and withhold 15 percent of the amount realized on the sale when the seller is a foreign person.
  2. Withholding is not required if the buyer is purchasing the property as the Buyer's primary residence and the purchase price is less than $300,000.
  3. Withholding is not required if the seller provides a non-foreign affidavit.

FIRPTA does not require a buyer to obtain a certification from a seller that the seller is not a foreign person. However, if a buyer relies on other means to determine that the seller was not a foreign person but the seller was, in fact, a foreign person, then the buyer is still subject to liability for failing to withhold the required 15 percent of the amount realized by the sale of the property. FIRPTA can be a very big deal for buyers; are you doing what you can to protect them?