How FIRPTA Can Affect a Buyer: What You Need to Know
When purchasing real estate in the United States, buyers are often focused on factors like property value, location, and financing. However, if the seller is a foreign person, there’s an additional consideration that can impact the transaction: the Foreign Investment in Real Property Tax Act (FIRPTA). Understanding FIRPTA and how it affects you as a buyer is crucial to ensure a smooth and compliant real estate transaction.
What is FIRPTA?
FIRPTA, enacted in 1980, is a U.S. tax law designed to ensure that foreign persons pay U.S. federal income tax on the sale of real estate located in the United States. The law requires that a portion of the sale proceeds be withheld and remitted to the Internal Revenue Service (IRS). This withholding acts as a prepayment of the seller’s potential U.S. tax liability on the sale.
How Does FIRPTA Affect the Buyer?
As the buyer, you have specific responsibilities under FIRPTA that, if not properly managed, could lead to financial consequences.
1. Withholding Responsibility: The buyer is responsible for withholding a percentage of the gross sales price and submitting it to the IRS. The standard withholding rate is 15%, but it can be 10% for properties under $1 million that will be used as the buyer’s residence. This withholding is not a tax on the buyer but is instead a prepayment on the seller’s taxes.
2. Determining FIRPTA Applicability: Before closing, the buyer (or their agent) must determine whether the seller is a foreign person. This is typically done through a non-foreign affidavit, where the seller certifies their U.S. status. If the seller is a foreign person, FIRPTA withholding applies.
3. Compliance and Filing Requirements: The buyer is responsible for filing IRS Form 8288 and Form 8288-A, along with the withheld funds, by the 20th day after the date of the transfer. Failure to comply with FIRPTA requirements can result in the buyer being held liable for the full amount of the tax, plus interest and penalties.
4. Potential Impact on Purchasing: If a deal lacks sufficient funds, it can put both buyers and sellers in a difficult spot. For sellers, having to contribute additional money to close the deal can be a significant burden. This can also impact the timing of the sale and potentially delay the buyer’s move-in date.
5. Buyer’s Liability: If the buyer fails to withhold and the seller does not pay the required taxes, the IRS can hold the buyer liable for the tax, including interest and penalties. This can be a significant and unexpected financial burden.
Exceptions and Exemptions
There are certain circumstances under which FIRPTA withholding may not apply or can be reduced. For example:
1. Residence Exception: If the buyer is acquiring the property as their primary residence and the sales price is $300,000 or less, no withholding is required.
2. Reduced Withholding Certificate: The seller can apply for a withholding certificate from the IRS to reduce or eliminate the withholding if they can demonstrate that the withholding exceeds their actual tax liability.
Be Informed and Prepared
For buyers, understanding FIRPTA is essential to avoid unexpected costs and legal complications. It’s advisable to work with a knowledgeable real estate agent, attorney, or tax professional who can guide you through the process and ensure that all FIRPTA requirements are met.
By being informed and prepared, you can navigate FIRPTA-related challenges smoothly and focus on the more exciting aspects of purchasing your new property.