FIRPTA “Tax” Overview

To motivate foreign sellers of real estate to file the required tax returns and to pay applicable income taxes, Congress passed the Foreign Investment in Real Property Tax Act in 1980. This law requires that the buyer withhold (usually through a Title Company or Law Firm) 15% of the amount realized. This amount is then sent to the Internal Revenue Service, where it is credited to the Seller’s account with the Service.

It is important to note that the “FIRPTA-Tax” must only be withheld and paid to the Service if the Seller is a non-resident of the United States. If, for example, the Seller has a permanent resident (“Green”) card or is a U.S. citizen, then no FIRPTA withholding would apply. Title Agents normally prepare “Residency Affidavits” as part of the closing where the Seller swears to the fact that he is a resident of the United States (within the meaning of the tax laws). The title agent is then able to rely on this affidavit unless they have reason to believe it to be false.

In the context of entities (LLC/Inc./LLP etc.), FIRPTA taxes usually do not apply, as long as the entity is considered a domestic entity. It is important to note, however, that if the entity transfers proceeds to the members, shareholders or partners, then the entity will have withholding obligations.

Willful failure to withhold the applicable taxes as well as attempts to circumnavigate the withholding process is a felony and may, upon conviction, be punished by fines and/or a prison term. Even non-willful failure to withhold and pay taxes may result in trust fund recovery penalties being assessed against personnel who may have directed the payments out of the entities and to the recipient.

Disclaimer: This Article is for general information purposes only and does not constitute legal advice.