FIRPTA: Foreign Investment in Real Property Tax Act
With our biggest selling time of the year fast approaching, we may see some of our Canadian homeowners cashing in on the "American Dollar" value of their property since they are currently seeing a decline in their Canadian dollar. Whether you are listing a foreign seller's property or working with buyers who plan to purchase a foreign seller's property, be sure to discuss in detail FIRPTA.
FIRPTA is an acronym for the Foreign Investment in Real Property Tax Act. This tax is imposed on the amount realized from the sale of real property owned by a foreign seller. There are exceptions to this tax-withholding requirement and given the complexities of the tax laws, buyer and sellers should consult with a tax specialist to determine the exact withholding amount and/or to see if an exemption to the FIRPTA requirement applies. Prior to 1981, foreign sellers were often exempt from US tax on the sale of real estate in the US. Congress created FIRPTA to make certain foreign persons and corporations for that matter, pay tax on the sale of any properties in the United States.
Review Standard V in the FAR-BAR contracts and Standard M in the NABOR contract that identifies what the buyer is required to do. It may be necessary to bring in an expert from Florida Home Title who is familiar with FIRPTA, and explain in detail to the buyer who does not completely understand the logistics of the tax to insure that the transaction gets to the closing table without a problem.
Under the FIRPTA law, there is no withholding requirement if the sales price is less than $300,000 and the residence is intended for buyer's personal use. Properties sold between $300,000 and $1,000,000 are subject to a 10% withholding tax on the amount realized, assuming the buyer will be using the property as a residence and not a rental. And in 2016, federal tax legislation was passed to increase the 10% to 15% withholding on the amount realized on any properties sold over $1,000,000 based on the fact that the buyer will be used as a residence. Consulting a professional will provide details with regard to the answers to questions about renting the property.
Usually the settlement agent/title company is the party that withholds and remits the funds to the IRS after closing, but it is the buyer who is legally responsible. And in certain circumstances, the buyer's agent can also be held liable. Agents should also be watchful for situations where the foreign seller forces the buyer to claim residence status merely to lower the withholding rate, since the buyer could be liable for any additional withholding tax, penalty and interest if ever challenged by the IRS.