It is important you understand the rules of the Foreign Investment in Real Property Tax Act for Investors. FIRPTA is a tax law that requires buyers to withhold payments to sellers on US real estate unless an exception applies. The duty is on the buyer to deduct and remit a portion of the sale price along with the appropriate forms.
The number one thing to know is to consult a licensed CPA who understands and specializes in FIRPTA transactions. There is a huge misconception in the real estate community that the paperwork and filings are the responsibility of the Title Company. Escrow Officers are not licensed to perform tax filing or to give tax advice. In reality if your Escrow Officer is handling this for you they are adding to your liability and with FIRPTA the fines and penalties can be in excess of 15 percent of your sales price.
Per the IRS regulations, the buyer or transferee is legally responsible for any withholding due. The IRS website is full of info and you should educate yourself on the regulations.
Many investors do not work with licensed real estate agents and do not use the AAR contract. A licensed agent would request disclosures from the seller that would include language about FIRPTA. The AAR contract also has language that limits liability for the buyer regarding FIRPTA.
As an investor it is important to know that FIRPTA may apply because it is the US person that has the responsibility of the tax for purchasing from the foreign seller. I cannot stress the need for you to get the proper tax advice from the proper source, a licensed CPA who is familiar with FIRPTA. There are several exceptions or exemptions to FIRPTA and they can be found on the IRS website but again, best to be familiar with the rules but rely on your expert.
The sooner you identify that your seller is foreign, the better. Sometimes processing can take several weeks to several months for the seller to apply for a withholding certificate which is one way to apply for a lesser or no liability amount.
Also remember to alert your Escrow Officer if you feel FIRPTA will apply as soon as you find out. Although the Escrow staff cannot prepare the tax documents, they still have to take your direction to collect the funds for payment to the IRS and may have additional company guidelines to follow.
If you would like further info on FIRTPA such as common exemptions or info on rates of withholding, please reach out to us! As the largest title company in the nation and a Fortune 500 company, Chicago Title is committed to protecting you and providing resources to do just that!
By Jill Bright, AVP/Sr. Sales Executive Chicago Title