Understanding the Effects of FIRPTA Exemptions

By admin

Did you know that you may be subject to tax withholding when buying a U.S. property from a foreign owner? During the COVID-19 pandemic, foreign real estate purchases experienced a boom. From April 2021 to May 2022, international buyers purchased an estimated 98,600 residential properties, totaling over $59 billion. If you are involved in a real estate transaction with one of these owners, whether as a buyer or an agent, you could be responsible for withholding a significant portion of the sale price, and if the foreign buyer does not pay U.S. income tax on the sale, you could be required to pay it.

What is FIRPTA?

The Foreign Investment in Real Property Tax Act (FIRPTA) was enacted in 1980 to ensure that the IRS would have an avenue to collect income from foreign real estate investors who do business in the U.S. Back then, buyers were required to file certain forms and hold 10% of the sale price in escrow. That amount was increased to 15% in 2015. This amount is held in escrow until the IRS is satisfied that the seller has satisfied all income tax requirements. In most cases, the money withheld is returned to the buyer once the seller has paid their taxes, although they will need to request a refund when they file their taxes the following year. If the seller does not pay income tax on the sale, the buyer can be made responsible for paying instead.

Exemptions to FIRPTA Withholding

While FIRPTA withholding can be an unexpected expense during any real estate transaction, there are some exceptions to the law. When buying real estate from a foreign buyer, be sure to study these exemptions and the notification requirements for each one. Here are some of those exceptions:

• You are an individual buying the property for use as your primary residence, and the sale price is not more than $300,000. You or a family member must also have definite plans to live in the house for at least 50% of the time during the first two 12-month periods after the transfer date.
• The seller gives you a certificate stating they are not a foreign person. Falsification of this document by the seller is considered perjury and is punishable by law.
• You have a certificate from the IRS stating that FIRPTA withholding is not necessary.
• The amount realized by the seller on the sale of the property is zero.

These are just a few of the exemptions to FIRPTA granted by the IRS; for more detailed information and additional exemptions, consult the IRS website.

Do You Need to be Concerned about FIRPTA?

The vast majority of real estate transactions in the U.S. will not be impacted by FIRPTA, but as a buyer, it is your responsibility to find out if the seller is a foreign person or entity. If you fail to do so before the closing date, many FIRPTA exemptions will no longer be available to you.

If you are involved in a real estate transaction with a foreign seller, it is important that you comply with all FIRPTA withholding requirements. In addition to being a trusted nationwide title insurance company, World Wide Land Transfer also provides escrow services. Get in touch with us if you need a title company holding escrow funds to keep your withholding amount in escrow until the IRS is satisfied that all tax requirements have been met.

World Wide Land Transfer is a service-oriented PA title company with offices in Philadelphia, New York, and Washington, D.C. With a record of going above and beyond, we are trusted to close everything from complex commercial transactions to residential refinance and purchase transactions.