Hello this is Deirdre Brown your settlement agent serving the District of Columbia, Maryland and Virginia. Today we’re going to talk about FIRPTA.
FIRPTA stands for Foreign Investment In Real Property Tax Act of 1980. It is an IRS law that states that title companies must withhold additional taxes and send it to the IRS if the seller is a non-us citizen or a non active green card holder. Please note that even if your seller has a social security number if their green card is not active FIRPTA applies.
The reason this is so important is because there’s a huge liability imposed by the IRS on the listing agent, the selling agent, the buyer and the title company if the law is not followed. The listing agent has a responsibility and a duty to ask during the listing appointment whether or not the seller is a US citizen and to disclose to the potential buyer and the title company if they find out that the seller is a non US citizen or does not have an active green card. The buyer may face financial liability if for some reason the transaction closes and the seller was a foreign national and did not have the taxes withheld. The IRS will come after the buyer and impose fines penalties and even seizure of their property in order to collect on this debt. The title company will be fined if we do not collect the withholdings and immediately give it to the IRS.
So, what is this withholding and how much is it? Although the citizenship status of the seller is what triggers this withholding, the calculations are based on the buyer. If the sales price of the property is $300,000 or less and the buyer affirms that they plan to live in the property as their principal residence for the next two years there is no FIRPTA withholding.
If the buyer is an entity such as an LLC or corporations there is a fifteen percent withholding of the sales price. Note that this is different than some other types of tax withholdings that are only on the net sales proceeds this is on the full sales price.
If the sales price of the property is between $301,000 and $1 million and the buyer plans to live in the property as their principal resident then ten percent of the sales price is withheld. If the buyer does not plan to live in the property as their principal residence or is an entity the withholding is fifteen percent of the sales price.
If the sales price is over $1 million the withholding is fifteen percent of the sales price.
If you are a seller and you think that you are exempt from this IRS code and they do have plenty of exemptions you may apply for. You need to reach out to a CPA that’s familiar with FIRPTA and it’s tax consequences. This is not something that we as a title company can help you with. However there is a withholding certificate you can apply for with the IRS. It can take between 90 and 120 days for the IRS to respond to your application. So you want to make sure you get that application in early in the process.
If you have additional title related questions please feel free to reach out to us at lexicontitle.com