The Foreign Investment in Real Property Tax Act (FIRPTA) has been around since 1980, if you have never come across it when buying real estate it may be more common now than it ever was! It affects you as a Buyer when you buy Real Estate from someone who is a foreigner.
“Don’t Wait to Buy Real Estate. Buy Real Estate and Wait.”
Will Rogers
FIRPTA IS HERE TO STAY AND YOU AS A BUYER NEED TO KNOW WHAT THAT MEANS TO YOU! CHECK OUT MY PODCAST!
Remember you as the Buyer are responsible for the tax withholdings!
Why Do I (as a buyer) Become Responsible for the Seller’s Taxes and what does this look like?
- A person who is selling their home may be subject to taxes and if that person(s) is not in the US Tax System as a required Tax Payer then they cannot be counted on to file a tax return and report the Real Estate Transaction.
- So Congress through the IRS decided in 1980 to have the US Taxpaying Buyer withhold the estimated taxes on the sale of the home.
- The Amount of the Withholding can change however currently it is 15% for most Real Estate transactions. (There are some ways to reduce this amount however, these exceptions benefit the Seller not the Buyer so be sure to talk to your CPA and Title Company before deciding to reduce the amount of the withholding)
- You want to make sure that your Title Agent is experienced in FIRPTA Transactions. If they are not find out if there is someone in the branch that is and is willing to take care of the FIRPTA portion of the transaction. This is so important…here are some horror stories:
Horror stories of how FIRPTA got messed up!
- The Title Company submitted the Federal Tax Withholding was deposited in the Title Companies EIN instead of the Buyers SSN as is required. The Title Company was not trying to take the funds the agent just had not done FIRPTA before and didn’t know. Well there substantial penalties and the IRS didn’t just say oh no problem we will just transfer it. It turned out to be a costly mistake requiring a Tax Attorney to resolve!
- Another Title Company just didn’t submit the Federal Tax Withholding to the IRS. Then a year later when the Seller went to file their return no withholding was there to be found! 6 figures in IRS penalties and did you know that the Title Company has each party sign a waiver that if they mess up you cannot go after them!!
- Then with one of the exceptions of agreeing as the Buyer to reduce the amount of the withholding to 10% by stating they will live in the property for more than 50% of the time that anyone lives in the property for the next 24 months…but then something changes and they rent it out and the IRS wants to know what is up!! You (buyer) promised you would not have anyone else live in the property more than you and now the IRS wants some answers and some $’s!!
- If all this sounds like a mess that you may not want to be a part of…well tell your agent to not show you FIRPTA homes otherwise you may find you have fallen in love with a home and then when you go to write the offer you get notified it’s FIRPTA.