Missouri Real Estate Lawyer

FIRPTA, the Foreign Investment in Real Property Transfer Act, is part of the U.S. tax code. It requires buyers of real estate to withhold up to 15% of the sale price when the seller is a foreign person. If the buyer does not withhold the required funds, and if the IRS cannot collect from the seller the tax owed on the transaction, then the buyer will be liable for the payment of the tax, plus interest. As such, whether buying commercial or residential real estate, it’s important to understand the requirements of FIRPTA. (FIRPTA withholding also applies to the purchase of an existing option to purchase real estate, and special rules apply to property transfers made pursuant to a foreclosure or a deed in lieu of foreclosure.)

FIRPTA Exceptions

Obviously, it’s hard for a buyer to know whether the seller is a foreign person, which includes not just nonresident aliens, but also foreign corporations, partnerships, trusts, and estates. Therefore, FIRPTA does not require buyers to make that determination. Rather, FIRPTA provides three general exceptions in which a buyer does not need to worry about withholding any portion of the sale price. However, if one of these exceptions does not exist, then the buyer should withhold the required funds, even if the name of the seller does not seem foreign, as, you never know. This test should be applied to every sale involving real estate located in the United States.

Sale Price Not Exceeding $300,000

First, a buyer does not need to worry about withholding if the real estate is residential property, the amount realized on the transaction does not exceed $300,000, and if the buyer “has definite plans to reside at the property for at least 50 percent of the number of days that the property is used by any person during each of the first two 12-month periods following the date of the transfer”, excluding days on which the property is vacant. Under certain circumstances, a buyer might be deemed to have occupied the property when a family member of the buyer resides there instead of the buyer. FIRPTA rules also provide exceptions to the occupancy requirement for certain unanticipated circumstances that prevent the buyer from occupying the property for the requisite time period.

FIRPTA Affidavit

Second, the buyer is also relieved of the burden of withholding if the seller provides an affidavit to the buyer that provides (i) the name and home address of each seller, (ii) the seller’s U.S. taxpayer identification number, and (iii) a representation that the seller is not a foreign person. The affidavit must be signed before a notary, and the seller must represent that the affidavit is true and that it is signed under penalty of perjury. Each seller must provide such affidavit, and the buyer must retain each affidavit for five years.

IRS Certificate

Third, the obligation of a buyer to withhold may be reduced or eliminated pursuant to a certificate to that effect issued by the IRS. Either the seller or buyer may request such certificate. Obtaining a certificate can take several weeks. A seller that is a foreign person should therefore apply for one prior to listing the property for sale. Additionally, the buyer must request a certificate if the buyer is required to withhold and if the initial payment to be made by the buyer to the seller will be less than the full amount that the buyer is required to withhold.

Managing Funds Withheld

If the buyer is required to withhold funds, then the buyer must pay such amount to the IRS within 20 days after the date of transfer. (The date of transfer is generally the day on which the buyer pays the seller the purchase amount.) The buyer must also file IRS forms 8288 and 8828-A. If the buyer requests a withholding certificate from the IRS on or before the day of transfer (as defined by FIRPTA regulation), then the buyer must still withhold the proper amount, but the buyer is not obligated to pay such amount to the IRS until 20 days after the day on which the IRS makes its final determination on the buyer’s application for a certificate.

Purchase Contracts

As you can see, these rules are complex and impose a serious liability on real estate buyers purchasing real estate from a foreign person. Therefore, every contract for the sale of real estate located in the United States should include a provision stating that the buyer shall withhold at closing all amounts due under FIRPTA, unless each seller provides to the buyer, prior to closing, a valid affidavit or certificate, or unless the sale is otherwise exempt from the withholding requirements of FIRPTA.

This article is for general informational purposes only, and it is not intended as legal advice. Sewell Law provides professional legal services in the areas of real estate law, business law, and litigation. Please contact Michael Sewell at (314) 942-3232 or at michael@sewelllaw.net to discuss your legal matters.

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