Foreign Investment in Real Property Tax Act: Buyer pays 10% of s

As of January 1, 1985, sales of real property by a foreign person within the United States are subject to the Foreign Investment in Real Property Tax Act (FIRPTA). The Internal Revenue Service is responsible for the administration of this tax law. Under FIRPTA, the Internal Revenue Service (IRS) requires a transferee (buyer) to withhold a portion of the sales price on all sales of real property owned by a foreign person. The transactions subject to this withholding include all sales, installment sales, exchanges, foreclosures and deeds in lieu of foreclosure. In most transactions, the amount to be withheld by the transferee (buyer) from the transferors (sellers) proceeds, is an amount equal to ten percent (10%) of the gross sales price. This sum is to be sent to the IRS within 20 days after the transfer of the real property interest. In most cases, escrow is instructed to deliver the funds to the IRS and to make sure that the proper IRS procedures and documentation have been properly complied with.

The withholding law only applies to foreign persons. The Internal Revenue Code (IRC) defines a foreign person as a nonresident alien or a foreign corporation that has not made a proper election to be treated as a domestic corporation or a foreign partnership, trust, estate or other taxable entity. A United States citizen is not a foreign person. A resident alien, if he or she is a lawful permanent resident of the United States, is not a foreign person. In addition, an individual whose residence is not within the United States, and who is not a United States citizen, is a nonresident alien.

In most cases, the real issue is whether an alien who is actually present in the United States, and who is not temporarily residing in the United States, is a United States resident for federal income tax purposes. Thus, an alien that is considered a U. S. resident is not subject to withholding under FIRPTA, if the alien meets either the following two tests:

(a)Substantial Presence Test. Under this test, an alien is considered a United States resident if the individual meets the substantial presence test for any given calendar year. The alien must be physically present in the United States on at least 31 days during the current calendar year and 183 days during the current year and the two preceding years, counting all the days of physical presence in the current year but only 1/3 the number of days of presence in the first preceding year and only 1/6 the number of days in the second preceding year.

NOTE: For purposes of this rule, a person is generally treated as physically present in the United States on any day he/she is physically present in the country at any time during the day.

(b)Green Card Test. An alien is considered an U.S. resident if the individual was a lawful permanent resident of the United State at any time during the calendar year.

There are a number of exemptions available where the Transferee (Buyer) is not required to withhold from the seller\'s sale proceeds. The exemptions are:

(a)Where each seller in a transaction delivers to the buyer a non-foreign affidavit stating that the seller is not a foreign person, the buyer is not required to withhold from any of the sellers\' sale proceeds. The affidavit, which is executed by the seller(s), is done so under the penalty of perjury. Included in the affidavit must be the seller\'s taxpayer identification number and home or office address. The non-foreign affidavit will protect the buyer from personal withholding liability if the buyer relied upon the affidavit in good faith and had no actual knowledge that the affidavit was false. The seller and buyer should retain the affidavit for a period of five years after the end of the year in which the transfer of title occurred.

Since it is often difficult for the buyer to have an independent means of knowing whether the seller is a foreign person. it is recommended that a seller\'s affidavit of non-foreign status be executed in each transaction by the seller.

(b)Where the buyer is purchasing the property as his/her personal residence and the sales price does not exceed $300,000, withholding of a portion of the seller\'s sales proceeds by the buyer is also not required. This exemption only applies when the transferee (buyer) has the specific intent to reside in property for at least fifty percent (50%) of the number of days the property is used. This means that if the property is rented the buyer, in order for the exemption to apply, must occupy the property for more days than it is to be occupied by tenants. This is particularly import in the case of vacation property that the buyer intends to occupy only periodically during a given year.

(c)Where the buyer receives a withholding certificate or qualifying statement issued by the Internal Revenue Service stating that no withholding is required, or that a lesser amount may be withheld, the buyer is not required to withhold the full 10% of the seller\'s sale proceeds or, in many cases, is not required to withhold any seller\'s sale proceeds.

(d)The transaction is a non-recognition transaction for the seller and the seller furnishes a notice of non-recognition.

WARNING: If the buyer fails to withhold the FIRPTA tax from the seller\'s sale proceeds, and if the seller does not pay the required taxes on time, the buyer may be liable for either the seller\'s tax or a penalty equal to ten percent of the purchase price, plus interest and penalties, whichever is less. Therefore, it is important in each transaction for the buyer to obtain a non-foreign affidavit from the seller. As long as the buyer relies in good faith upon the seller\'s execution of the non-foreign affidavit, the buyer is not liable for the tax, even if the affidavit is false. However, if the buyer knows the affidavit is false, then the buyer has personal liability for the tax.

An agent of the buyer or seller is also potentially liable to the IRS for the 10 percent of the sales price that would have been withheld, or for the seller\'s actual tax liability in the sale, or for the amount of commission or other compensation received by the agent, whichever is less, plus interest and penalties only if either:

(a)the seller provides a non-foreign affidavit and the agent knows the affidavit is false.

(b)the interest being sold is shares of stock or some other interest in a U. S. Real Property Holding Corporation and the corporation furnishes statement that the transfer of the interest is not a transfer of a U.S. real property interest and the agent knows the statement is false.


Statutory Authority: Title 26, U.S. Codes, Section 1445.