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With foreign buyers again flocking to buy United States real estate, it is important as a Buyer Realtor to remember to advise them of their obligations and liabilities when they sell it.  FIRPTA (Foreign Investment in Real Property Tax Act) has been around for decades, yet many Realtors forget to tell their foreign buyers of the implications of FIRPTA when the foreigner is looking to buy, thereby possibly short changing their client on options and surprising them with expenses when they sell.

Some Basics:

There is no tax when the property is purchased - it is when it is sold.

A corporation owned by a foreign national is generally subject to FIRPTA.

If a married couple owns the house and one spouse is foreign, then the foreign spouses' one-half interest is subject to FIRPTA.

If a married couple owns the house and one spouse is foreign but is deceased, the deceased interest is still counted as being foreign owned.

The way FIRPTA works, at the sale the closing agent or the new Buyer must withhold and submit to the IRS 10% of the sale price.  Note, that is 10% of the contract sale price, not the net to seller!  The Seller then needs to file a tax return and either pay the additional tax (if more would be due) or seek the refund.

Short Sale transactions are NOT exempt and require the tax be paid.

There Are Some Areas of Relief:

You can apply for an Exemption Certificate from the IRS, which as of now takes about a month to obtain.  If you have no one familiar on how to do it, our firm can do it for you. The Exemption Certificate sets forth the financial aspects of the prior purchase and the present sale of the property and shows that no profit is being made, and thus the IRS will issue a certificate to that effect, exempting the closing agent/buyer from having to withhold the 10% of the sale price.

If the property being sold is residential property and the sale price is under $300,000, and the Buyer will sign an affidavit that the Buyer and family will be the exclusive user of the property for half of EACH of the next two years, then the closing agent can rely on the affidavit and not collect the withholding 10% tax.  A bit weird but many transactions fall into this category.

If a foreign corporation that has elected to be treated as a domestic corporation and furnishes the buyer with a Non-Foreign Person Certification (Entity Transferor), then no withholding will be required.

See my previous articles on FIRPTA here on ActiveRain at FIRPTA and SHORT SALES - DANGEROUS LIABILITY TO BUYER AND CLOSING AGENT and at SHORT SALE AND FIRPTA TAX WITHHOLDING - IRS ISSUES PRIVATE GUIDANCE.  The IRS law on FIRPTA can be found at Foreign Investment in Real Property Tax Act of 1980.

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© 2013 Richard P Zaretsky, Esq.

Be sure to contact your own attorney for your state laws, and always consult your own attorney on any legal decision you need to make.  This article is for information purposes and is not specific advice to any one reader.

Richard Zaretsky, Esq., RICHARD P. ZARETSKY P.A. ATTORNEYS AT LAW, 1655 PALM BEACH LAKES BLVD, SUITE 900, WEST PALM BEACH, FLORIDA 33401, PHONE 561 689 6660  RPZ99@Florida-Counsel.com - FLORIDA BAR BOARD CERTIFIED IN REAL ESTATE LAW - We assist Brokers and Sellers with Short Sales and Modifications and Consult with Brokers and Sellers Nationwide!  Shortsales@Florida-Counsel.com  New Website www.Florida-Counsel.com. 

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In a nutshell, FIRPTA requires the closing agent or buyer to withhold 10% of the amount realized (usually the purchase price) to ensure that the tax due on the sale is given to the IRS. Basically the IRS doesn't want the money leaving the U.S. until they get theirs.

So how does this affect a Short Sale for a foreign investor? To answer this try submitting a preliminary HUD to a Short Sale lender where 10% of the purchase price is being deducted from the lender's proceeds. Usually what happens is that the Short Sale lender comes back and demands that this reduction be removed.

"But Mr Lender, the IRS says we can't do that. We MUST withhold 10%!

"Then.....Mr Short Sale Broker....NO SHORT SALE FOR YOU!!"

So what do you do?

There are exceptions to the FIRPTA withholding. One is, if the sale is $300,000 or less and the purchaser is a homeowner who is going to use the property as their residence for at least 50% of the year then the closer may be able to avoid the FIRPTA withholding all together. This is certainly the easiest way to go.

Secondly, a CPA can file for a Withholding Certificate. The reality is that in a short sale the chance of the seller owing any capital gains tax is slim to none. So they have the option of filing with the IRS in advance of the closing to receive an exception. The IRS can come back stating that a lessor amount or even zero is owed. Once the Withholding Certificate is received the transaction can close with no withholding. The problem with this method is that the filing for the Withholding Certificate can't happen until there is a contract to purchase the property. The IRS could take 3-5 months to make a ruling. You'll need to keep the deal together during this time.

The third option is to get the lender to agree to the 10% withholding with the understanding that once the Withholding Certificate is received the closing agent can release the 10% to the lender. In order for this to happen the filing for the Withholding Certificate would have already needed to be done. The fact that it's been filed allows the closer to withhold the 10% without sending it to the IRS. They can hold it in escrow instead. Then there would need to be an escrow agreement between the seller, buyer and lender stating the funds (minus any tax owed) will be released to the lender.

I bet this is as clear as mud now!!