23 Jan Why is the FIRPTA Affidavit Important For Home Buyers and Home Sellers?
This document, included in the seller’s opening package, requests that the seller swears under penalty of perjury that they are “not a non-resident alien for purposes of United States income taxation.” A Seller unable to complete this affidavit may be subject to withholding up to 15%. Because, by law, the buyer is the withholding agent, it is important for both parties to understand whether withholding is applicable to the transaction.
Here is a graph that explains how withholding amounts are calculated:
|Buyer Intends to Use Property as a Residence? *||YES||NO|
|$300,000 and Under||$0||15%|
FIRPTA Defined: Foreign Investment in Real Property Tax Act of 1980
The Internal Revenue Service defines it as: “The disposition of a U.S. real property interest by a foreign person (the transferor) is subject to the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) income tax withholding. FIRPTA authorized the United States to tax foreign persons on dispositions of U.S. real property interests.”
What to expect in escrow:
- Ask if the escrow holder meets regulatory standards to issue a Qualified Substitute certification to the buyer regarding the seller’s foreign status.
- If withholding applies, expect to instruct escrow holder regarding withholding that will be needed at close of escrow. An amendment will be prepared requiring buyer and seller signatures. Here is an IRS link to the exceptions: https://www.irs.gov/individuals/international-taxpayers/exceptions-from-firpta-withholding
Foreign Buyers/ Investors:
- Consult with a tax advisor who specializes in foreign investors at acquisition to help streamline reconciliation when it’s time to sell.
- The FIRPTA Affidavit is customarily part of the opening package.
- Here is a sample of the form. https://californiaeliteescrow.com/wp-content/uploads/Draft-FIRPTA-Seller.pdf
- It is recommended foreign sellers review the form carefully with their tax advisor.
- Residency at the time escrow is open is not necessarily a factor.
- Not related to citizenship or birthplace of seller.
- To facilitate an efficient reconciliation of the transaction at year-end, it is recommended that a TAX ID be obtained when the property is listed for sale.
- Consult with a tax advisor specializing in foreign investors.
- Discuss options with both your tax professional and listing agent BEFORE going into escrow.
- If reduced withholding is being requested and a hold is being considered, consult with your listing agent to explore negotiating with the buyer. Call your escrow officer for more details on requirements. Ask for an escrow officer that specializes in foreign investor transactions.
Here are a few common questions related to Foreign Investment in Real Property Tax:
Who is the IRS referring to when they say “foreign?”
According to the IRS, the Foreign Investment in Real Property Tax applies to foreign individuals, foreign corporations, and foreign partnerships. FIRPTA does not apply to residents who possess a green card by the Immigration and Naturalization Service (INS) or can prove a legal, physical presence in the U.S. for a certain time period. More information about “Foreign Persons and Corporations” can be found on the Internal Revenue Service website.
Did the amount of withholding change in the last decade?
Yes. In 2015, the tax rate increased from 10 percent on all transactions