When the seller of real property (real estate) is a foreign individual, the transfer is subject to the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA). In a transaction that is subject to FIRPTA, a percentage of the sales price or amount realized is withheld. The amount withheld is generally 10%, but may be a different amount in certain instances.
The purpose of this withholding is to protect the buyer from tax liability to the IRS for taxes owed by the seller, as the seller will be required to pay taxes for their gains and/or earnings on the sale of the real property. The purpose of holding the buyer responsible for FIRPTA is to ensure the tax is paid even after the foreign seller may have no connection with the US. Before FIRPTA became law, the IRS had no way to ensure the sellers would pay the required taxes for the sale of the property.
The seller will obtain the difference between the amount withheld and the taxes owed when they file their next year’s tax return.
The buyer is ultimately responsible for the FIRPTA withholding, including the processing of the FIRPTA procedure. The buyer’s duties for the FIRPTA transaction include reporting the sale to the IRS and paying the required withholding to the IRS. If FIRPTA was not properly conducted, or if the amount was not withheld by the buyer, then the buyer is liable for the taxes owed to the IRS for the transfer of property.
There are many requirements and specific documents needed to process a FIRPTA transaction, including certified identification, tax forms, and more. Here at Boyer Law Firm, we have a vast experience in handling the closing of real estate transactions for both buyers and sellers, and we have handled FIRPTA transactions for both buyers and sellers.