A complete overview on why you need to know about it…
If you are purchasing property from a non-US individual or entity, you may be required to withhold taxes under the Foreign Investment in Real Property Tax Act of 1980 (“FIRPTA”), 26 U.S.C. 1445 (unless one of the exceptions in the Act applies). The seller must complete a certification to inform both you (the purchaser) and the closing agent (typically the escrow company) whether tax withholding is required.
The above law applies to foreign corporations, partnerships, trusts, estates and other foreign entities, as well as to foreign individuals. If the seller is a corporation, partnership, trust, estate or other entity, the terms “I” and “my” in the doc refer to the entity rather than an individual. A “real property interest” includes full or part ownership of land & any improvements; leaseholds; options to acquire any of the foregoing; and an interest in foreign corporations, partnerships, trusts or other entities holding U.S. real estate.
Under IRS code, the certification must include the property address, seller’s citizenship status, taxpayer identification number, and home address. Note that while the certification is delivered to the buyer prior to closing, social security numbers are not inserted until after the seller signs closing papers in order to prevent fraud.
Obtaining this completed certification is of critical importance because a home buyer can be personally liable for the full amount of FIRPTA withholding tax required to be withheld, plus penalties and interest. When a seller is a foreign person, the buyer and seller are advised to seek the guidance of an accountant or tax attorney to determine the best steps forward. Closing agents and real estate brokers are not qualified or permitted to provide tax advice or guidance.
What the FIRPTA Certification says about Required Withholding if the Seller is a Non-Resident Alien under IRS Guidelines
“If the seller is a non-resident alien, and has not obtained a release from the IRS, then the closing agent must withhold 15% of the amount realized from the sale and pay it to the IRS, unless the buyer certifies that the selected statement below is correct:
□ Amount Realized ($300,000 or less) and Family Residence= No Tax. (a) I certify that the total price that I am to pay for the property, including liabilities assumed and all other consideration to Seller, does not exceed $300,000; and (b) I certify that I or a member of my family* have definite plans to reside on the property for at least 50% of the time that the property is used by any person during each of the first two twelve-month periods following the date of this sale. If the buyer certifies these statements, there is no tax.
□ Amount Realized (more than $300,000, but not exceeding $1,000,000) and Family Residence= 10% Tax. (a) I certify that the total price that I am to pay for the property, including liabilities assumed and all other consideration to Seller, exceeds $300,000, but does not exceed $1,000,000; and (b) I certify that I or a member of my family* have definite plans to reside on the property for at least 50% of the time that the property is used by any person during each of the first two twelve-month periods following the date of this sale. If Buyer certifies these statements, then Closing Agent must withhold 10% of the amount realized from the sale and pay it to the IRS.
* (Defined in 11 U.S.C. 267(c)(4). It includes brothers, sisters, spouse, ancestors and lineal descendants).
Under penalties of perjury, I declare that I have examined this Certification and to the best of my knowledge and belief both statements are true, correct and complete. I understand that this Certification may be disclosed to the IRS and that any false statement I have made here could be punished by fine, imprisonment or both.”
Exceptions from FIRPTA Withholding
The IRS lists eleven exceptions to FIRPTA withholding listed on the IRS website. Of these, there are three that are more typically seen in residential real estate transactions:
OWNER-OCCUPIED BUYER: Sales price is $300,000 or less, and the individual buyer or a member of their family has definite plans to reside in the property for at least 50% of the number of days the property is used by any person during each of the first two 12-month periods following the sale.
NOT A FOREIGN SELLER: Seller signs a FIRPTA certification (form 22E) stating that the seller is not a foreign person.
WITHHOLDING CERTIFICATE: Before closing, seller obtains a withholding certificate from the IRS which reduces or eliminates the FIRPTA tax for the foreign person. The seller or transferor should also work with an accountant or tax attorney.
In most cases, the buyer or closing agent is the withholding agent. If you are the transferee/buyer, you must find out if the transferor is a foreign person by obtaining the FIRPTA Certification. If the transferor is a foreign person and you fail to withhold, you may be held liable for the tax. For cases in which a U.S. business entity such as a corporation or partnership disposes of a U.S. real property interest, the business entity itself is the withholding agent.
Delivery of the FIRPTA Certification is Required in NWMLS Purchase Agreements
Because this could be a significant aspect of a home purchase, our local MLS requires all sellers to disclose if they are a foreign person at the time of listing a property for sale. The seller’s real estate broker will also ask the seller to complete the FIRPTA Certification on a NWMLS Form 22E at that time.
The seller or their real estate broker must then deliver the completed NWMLS Form 22E (as part of the contract or separately to the closing agent) within 10 days after you have a mutually agreed upon contract. Failure to do so can create an out for the buyer.
The contract further requires seller to warrant their citizen status to buyer, provides instructions to the closing agent, and outlines the termination process in the event the FIRPTA Certification is not timely delivered.
“Seller Citizenship and FIRPTA. Seller warrants that the identification of Seller’s citizenship status for purposes of U.S. income taxation in Specific Term No. 14 is correct. Seller shall execute a certification (NWMLS Form 22E or equivalent) under the Foreign Investment in Real Property Tax Act (“FIRPTA”) and provide the certification to the Closing Agent within 10 days of mutual acceptance. If Seller is a foreign person for purposes of U.S. income taxation, and this transaction is not otherwise exempt from FIRPTA, Closing Agent is instructed to withhold and pay the required amount to the Internal Revenue Service.
If Seller fails to provide the FIRPTA certification to the Closing Agent within 10 days of mutual acceptance, Buyer may give notice that Buyer may terminate the Agreement at any time 3 days thereafter (the “Right to Terminate Notice”). If Seller has not earlier provided the FIRPTA certification to the Closing Agent, Buyer may give notice of termination of this Agreement (the “Termination Notice”) any time following 3 days after delivery of the Right to Terminate Notice. If Buyer gives the Termination Notice before Seller provides the FIRPTA certification to the Closing Agent, this Agreement is terminated and the Earnest Money shall be refunded to Buyer.”
Definitions and Resources Related to FIRPTA
The IRS provides a Definitions of Terms and Procedures Unique to FIRPTA web page with helpful information, including how executors of estates, partnerships, corporations, and spouses (where only one spouse is a foreign person) should proceed.
In addition, there is also Individual Taxpayer ID Guidance for Foreign Property Buyers/Sellers to provide documentation requirements for individuals seeking an ITIN.
If you are looking for information on Reporting and Paying Tax on U.S. Real Property Interests or general Real Estate Tax Center guidance, you’ll find it on the IRS.gov website as well.
Obtaining FIRPTA Certification in your home purchase and, when your seller is a foreign person, verifying that any required withholding is made is an important step you can take to provide peace of mind. This article is provided solely to inform you of the need to be alert to this issue. It does not replace competent legal or tax advice. You should also seek the guidance of a qualified professional regarding your individual situation.
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