Real estate closings involve a number of financial and legal requirements, and when the seller is a foreign person, an additional federal law may come into play. The Foreign Investment in Real Property Tax Act (FIRPTA) establishes withholding requirements for certain transactions involving foreign sellers of U.S. real estate.
For buyers, sellers, and real estate professionals, recognizing a potential FIRPTA transaction early can make a significant difference. Addressing the requirements before closing can provide more time to gather documentation, determine whether withholding applies, and avoid last-minute complications.
When Does FIRPTA Withholding Apply?
Under FIRPTA, when a foreign person sells or transfers a U.S. real property interest, the buyer is generally required to withhold 15% of the amount realized in the transaction and remit the appropriate funds and documentation to the IRS.
The withholding amount is generally based on the amount realized from the sale rather than the seller's actual profit or capital gain. That distinction can be important when buyers and sellers first encounter FIRPTA.
Not every transaction is handled exactly the same way. Exceptions and reduced withholding may be available under certain circumstances, making it important for the parties to understand the requirements that apply to their specific transaction.
The Buyer's Role in a FIRPTA Transaction
One aspect of FIRPTA that sometimes surprises people is that the buyer generally carries the responsibility for withholding when the law applies.
The seller may be required to provide certifications or other documentation regarding their tax status, while the buyer may have responsibilities for withholding and reporting to the IRS. Depending on the circumstances, additional forms or documentation may also be required.
Because these responsibilities can affect the closing process, FIRPTA should not be treated as something to address at the last minute.
Planning Ahead Can Help Keep the Closing on Track
When there is a possibility that a seller may be considered a foreign person for U.S. tax purposes, it's a good idea to raise the issue early.
Identifying FIRPTA requirements ahead of closing gives the parties time to obtain appropriate guidance, prepare necessary documentation, and resolve questions before funds are scheduled to be disbursed. Buyers and sellers can also consult their tax or legal professionals regarding their individual responsibilities.
At Metro National Title Associates, our team works with buyers, sellers, real estate professionals, and other parties to help facilitate an organized title and closing process. When FIRPTA may apply, identifying those requirements early can help everyone prepare for a smoother transaction.
If you are buying or selling real estate and believe FIRPTA could be involved, contact Metro National Title Associates early in the transaction so potential title and closing requirements can be addressed well before closing day.
This information is provided for general educational purposes only and does not constitute legal or tax advice. FIRPTA requirements vary based on the circumstances of each transaction. Buyers and sellers should consult with a qualified tax professional or attorney regarding their specific obligations.
