U.S. Real Estate Transactions Subject to FIRPTA 

A real estate sale in which the seller is a foreign national is subject to FIRPTA withholding.  FIRPTA stands for Foreign Investment Real Property Tax Act of 1980 and requires the title company to withhold 10% from the seller's proceeds and submit to the IRS.  A reduced for withholding certificate (also known as the release letter) can be applied for prior to the closing so as to avoid submitting the 10% to the IRS or even having to withhold at all if the certificate is issued before closing. 

Understanding the FIRPTA process and being prepared may help avoid the risk of a real estate sale falling through, especially in Short Sales.

Real estate agents have the responsibility to ensure both BUYERS and SELLERS are aware when the sale is subject to FIRPTA mainly because they are in first contact with the prospects.

  • If a seller is a foreign national, the transaction will be subject to FIRPTA no matter who the buyer is (one exception will be explained later).
  • At the time of the listing agreement, the seller's agent should explain FIRPTA to the seller, refer them to their tax accountant or refer them to an accountant who is knowledgeable of dealing with FIRPTA.
  • Title companies are a great source for referring accountants because of having the continual experience of working with them.
  • Informing the seller of FIRPTA at the time of the listing (and not at the time of closing)shows the agent is professional and also helps to safeguard complications later when under contract.
  • Once you have an accepted offer, inform the buyer's agent the real estate transaction is subject to FIRPTA and the buyer will need to comply with the requested information.
  • Include a FIRPTA disclosure in the contract, like you would an HOA or other disclosure forms.  Doing this may also help save a closing from falling through (explained later)

Process of FIRPTA transactions and key individuals (basically introduction to all parties)

  1. Seller's agent must inform the seller and buyer's agent that FIRPTA applies.
  2. Seller employs an accountant to apply for the reduced for withholding certificate
  3. Seller's agent provides the accountant the buyer's agent and title company contact details.
  4. Account contacts title company to inform them they will apply for the certificate.
  5. Accountant contacts buyer's agent to obtain the buyer's information. (Names, Social Security Numbers and or ITIN)
  6. Buyer's agent contacts buyers for information and provides it to the accountant (or seller's agent).  a)  If buyer is a U.S. resident they will have to provide their Social Security Number b) If buyer is a foreign national and they do not have an ITIN, they must apply for it.  i)  The same accountant applying for withholding certificate can apply for the buyer's ITIN (usually there is no charge or fee) or they can choose an accountant of their own to apply for the ITIN.  ii)  The ITIN application (FORM W-7)is an IRS tax form and should not be given to either buyer or seller's agent to complete on behalf of the prospects.  Accountants who are applying for the ITINs must correspond with the applicants directly.  iii)  Both buyers and sellers need ITINS for the seller's withholding certificate application.

Once the accountant has obtained all the information, the real estate agents are basically no longer involved when it comes to the FIRPTA portion of the sale; the remainder of the process rests on the accountant.  This is why it's so important to work with a knowledgeable accountant who is familiar with Foreign Persons Involved in U.S. Real Estate Transactions.

In a FIRPTA transaction, the real estate agent's role is very minimal, but it's the most crucial because they must bring the seller and accountant together from the beginning of the sale (and even prior maybe around the listing period)

  • Withholding certificates may take up to 30-60 days to obtain.  In a short sale where the funds are needed to close, the title company must have the certificate before closing otherwise the closing will be delayed.
  • Buyers who either do not want to comply with FIRPTA by providing their Social Security Number or applying for their ITIN must be reminded that they signed both the contract (which states compliance if subject to FIRPTA) and the disclosure (explained earlier)
  • Sellers may choose to back out of a real estate transaction if the buyer insists not to comply without being in default.

Exceptions:

  • Buyers are purchasing property as a residence and the price is under $350,000
  • The amount realized is zero
  • Seller who is a U.S. corporation (LLC's and Partnerships MUST BE WITHHELD)

After the Closing:

If the reduced for withholding certificate was not issued prior to the closing and the funds were not needed to close, the title company will hold the 10% withheld in an escrow account until the certificate arrives - and the closing occurs as scheduled (funds and commissions can also be dispersed.)  Some real estate agents continue to monitor the status of the seller's funds.  Sellers must continue to communicate with the accountant or title company for the status of their funds.

 

 Content provided by the courtesy of Professional Accounting & Tax Services Inc. 1420 Celebration Blvd, # 200, Celebration Fl 34747 407-429-4364