FIRPTA is the abbreviation for the Foreign Investment in Real Property Tax Act and was created to ensure any foreign person or entity pays the necessary taxes when they sell property in the United States. This law was enacted because the U.S. Internal Revenue Service (IRS) was concerned that foreign persons would sell their real estate and then leave the country without paying the tax due on the sale. Therefore, the IRS determined the best solution was to have the Buyer be responsible for making sure the tax is collected. The reasoning for this is, the Buyer will still be in the country after the sale and they have an identifiable asset, the purchased property, that the IRS could attach a lien to if necessary.
Therefore, under FIRPTA, the Buyer of the real estate must either pay, or withhold as a tax, up to 15% of the total amount realized in the sale if the Seller is considered a foreign person. If it is determined that the Seller is a foreign person and the Buyer has not paid or withheld the tax amount, then the Buyer could be held liable by the IRS for the unpaid tax. Furthermore, if the Buyer has not paid the tax or withheld the appropriate amount, a tax lien could be placed on the property.
Considering the potential liability to the Buyer, it is important that the parties execute the appropriate documents at closing to comply with FIRPTA. If the Seller is a non-foreign person, then he or she will often execute the FIRPTA Affidavit at closing. This affidavit is a sworn statement by the Seller, under penalties of perjury, that states the Seller is a non-foreign person in accordance with FIRPTA. In the event the Seller is a foreign person, the Buyer will need to withhold the required amount in compliance with FIRPTA.
Although FIRPTA was enacted to prevent foreign Sellers from leaving the country without paying the taxes from the sale, it has resulted in an increase in potential liability for the Buyers of real estate from foreign Sellers. Therefore, it is beneficial for the Buyer to understand the implications of FIRPTA and seek the advice and assistance from a real estate attorney in real estate transactions that involve a foreign Seller.
If you have any questions on this act please contact one of our experienced real estate attorneys, they would be happy to assist you.