U.S. Realtor’s, rental agents, and closing agents are encountering an increasing number of situations that involve foreign persons selling their U.S. real estate.
The sale of a U.S. real property interest by a foreign person is subject to the Foreign Investment in Real Property Tax Act of 1980 (also known as FIRPTA) income tax withholding. This Act taxes non-U.S. investors on gains from U.S. real property investments.
*Please note that FIRPTA applies to what it defines as a U.S. real property interest, which includes not only interests in land, but interests in buildings, mines, wells, crops and timber as well.
What does this mean for foreign owners? When an individual foreign person sells U.S. real property, the transferee, usually settlement officers or closing agent’s, are required to withhold ten percent of the amount realized on the sale. There are special rules for foreign corporations, which will not be discussed in this Article. The amount realized is generally the amount paid for the property commonly known as the purchase price.
The ten percent must be withheld at closing and be remitted to the Internal Revenue Service (IRS) no later than 20 days after the transfer.
What does this mean to real estate and closing agents? It is important for agents to inform foreign owners of the FIRPTA withholding requirement or the requirement to provide a tax identification number (TIN). If you do not inform or give enough notice to the foreign owners of the FIRPTA requirements you may be held liable.
There are some exceptions to the FIRPTA withholding, and the most common is that the transferee is not required to withhold tax in a situation in which the purchaser/buyer purchases real estate for use as his or her home and the purchase price is not more than $300,000.00.
Gulati Law deals with these types of issues on a regular basis with their foreign clients. We also assists with contract preparation and real estate closings, as her law firm is equipped to issue title insurance, owner’s policies and lenders policies. Raised by a family of real estate brokers, she has the experience and knowledge as well as being a licensed Real Estate Agent herself.