A disposition of real property by a foreign person is subject to the Foreign Investment in Real Property Tax Act of 1908 (FIRPTA) income tax withholding. The tax-withholding requirements under FIRPTA are designed to ensure that foreign sellers pay taxes.
A Buyer should always make sure to confirm whether the seller is a foreign person under the rules of FIRTPA. Purchasing real property from a foreign person requires the Buyer to deduct and withhold a tax on the total amount realized by the foreign person on the sale.
Here is the breakdown of the withholding amounts under FIRPTA:
- 0% withholding on the transfer of property to an individual transferee where the transferee or certain members of the transferee’s family intend to use the property as a residence for at least ½ the time the property will be used by anyone as a residence during the first two 12-month periods following the transfer AND the amount realized is $300,000 or less.
- 10% withholding for transactions closing on or after February 16, 2016, where the real property will be used by the transferee as a residence and the amount realized is greater than $300,000 but not more than $1,000,00.
- 15% withholding on all other transfers by a foreign person.
Remember that if the seller is a foreign person and the buyer fails to withhold, they place themselves at risk and may be liable for the tax.
One way a Buyer can protect themselves is by obtaining a nonforeign affidavit from the Seller. Unless the purchaser has actual knowledge or receives notice that the Seller is a foreign person, the purchaser would be excluded from the withholding requirement.
At closing, a Seller will be asked by Access Title Agency to sign an Affidavit attesting to the fact that they are not a foreign person.
For more information, go to https://www.irs.gov/individuals/international-taxpayers/firpta-withholding for FIRPTA Withholding Requirements.