Unexpected Suprise at Closing (FIRPTA)

The sale of a home, owned by a person who is not an income tax resident of the United States is relatively painless. It is important to remember, though, that the sale of US Real Property is generally taxable in the United States and thus, the seller generally is required to file an income tax return to declare the sale, even if no gains are achieved.

To motivate foreign sellers to file the appropriate tax returns and to pay applicable taxes, Congress passed the Foreign Investment in Real Property Tax Act (FIRPTA) in 1980 which requires that the buyer or his agent withhold and remit to the Internal Revenue Service 10% of the sales price. This can come as a nasty surprise at closing, to an unwary seller.

Once the FIRPTA tax has been withheld, the seller of the real estate will need to file an income tax return to claim the withheld amounts as a prepayment against the taxes that are calculated based upon the actual gains achieved during the sale. Usually, the withheld amounts exceed the actual taxes due because it is a percentage of the sales price and not based on the gain. Thus, a seller should see if they qualify for one of the exceptions to withholding or apply for a withholding certificate.

Disclaimer: This Article is Intended as general information and not as legal advice as every situation is unique and requires detailed analysis.