FIRPTA - Foreign Investment in Real Property Tax Act
In this video Deirdre P Brown explains FIRPTA (the Foreign Investment in Real Property Tax Act).
Hello this is Deirdre Brown your settlement agent serving Maryland, DC and Virginia. Today we're going to talk about FIRPTA.
FIRPTA stands for Foreign Investment In Real Property Tax Act of 1980. it is an IRS law that states that title companies must withhold additional taxes and send it to the IRS if the seller is a non-us citizen or a non active green card holder. Please note that even if your seller has a social security number if their green card is not active FIRPTA applies.
The reason this is so important is because there's a huge liabilities imposed by the IRS on the listing agent, the selling agent, the buyer and the title company. The listing agent has a responsibility and a duty to ask during the listing appointment whether or not the seller is a US citizen or not and to disclose to the potential buyer and the title company if they find out that the seller is a non US citizen or does not have an active green card. The buyer may be liable if for some reason the transaction closes and the seller was a foreign national and did not get the taxes withheld. The IRS will come after the buyer and impose fines penalties and even seizure of their property in order to collect on this debt. The title company gets fined if we do not collect the withholdings and immediately give it to the IRS.
So, what is this withholding and how much is it? If the sales price of the property is $300,000 or less and the buyer affirms that they plan to live in the property as their principal residence there is no FIRPTA withholding.
If the buyer is an entity such as an LLC or corporations there is a fifteen percent withholding of the sales price. Note that this is different than some other types of tax withholdings that are only on the proceeds this is on the full sales price so it can be a huge number.
If the sales price of the property is between $301,000 and $1 million and the buyer plans to live in the property as their principal resident then there is a ten percent of the sales price withholding. If the buyer does not plan to live in the property as their principal residence or is an entity the with holding is fifteen percent of the sales price.
If the sales price is over $1 million the withholding is fifteen percent of the sales price.
If you are a seller and you think that you are exempt from this IRS code and they do have plenty of exemptions you may apply for and exemption. You need to reach out to a CPA that's familiar with FIRPTA and it's tax consequences. This is not something that we as a title company can help you. However there is a withholding certificate you can apply for it can take between 90 and 120 days for the IRS to respond to your application. You want to make sure you get that application in early in the process.
If there are two owners and one is a US citizen one is not then the FIRPTA withholding will only be on the percentage of the sales price of the person who is the non-us citizen.
If you have additional title related questions please feel free to reach out to me at closewithdee.com