When a real estate transaction involves a foreign seller, the closing process may include an additional federal requirement known as the Foreign Investment in Real Property Tax Act, or FIRPTA. FIRPTA was created to help ensure that certain foreign sellers of U.S. real estate meet applicable U.S. tax obligations when property is transferred.
For buyers, sellers, and real estate professionals, identifying a possible FIRPTA transaction early can help reduce confusion and prevent delays as closing approaches.
How FIRPTA Withholding Works
If FIRPTA applies, the buyer is generally responsible for withholding 15% of the amount realized by the foreign seller and submitting the appropriate funds and documentation to the IRS.
That percentage is generally based on the amount realized in the transaction, not simply on the seller’s profit or capital gain. This is an important distinction because the withholding amount can be different from the seller’s actual tax liability.
Depending on the circumstances, certain exceptions or reduced withholding rules may apply. Because of that, buyers and sellers should avoid assuming that every FIRPTA transaction will be handled exactly the same way.
Why FIRPTA Matters to Buyers
Although FIRPTA is tied to the sale of property by a foreign person, the buyer generally has the responsibility for the required withholding when the law applies.
The seller may need to provide certifications or documentation regarding their tax status, while the buyer may have responsibilities involving withholding, reporting, and IRS forms. Those requirements can affect the timing and flow of the closing if they are not addressed in advance.
Prepare for FIRPTA Early in the Transaction
The sooner a potential FIRPTA issue is identified, the more time the parties have to determine what documentation may be needed and seek appropriate tax or legal guidance.
Addressing the issue early can also help the title and closing team prepare for any additional requirements before closing day, rather than trying to resolve them at the last minute.
At Metro Experience Title, we work with buyers, sellers, real estate professionals, and other parties to help create a smooth and organized title and closing experience. When FIRPTA may be involved, identifying the issue early can help everyone understand what may be required and keep the transaction moving forward.
If you are involved in a real estate transaction with a foreign seller, contact Metro Experience Title early in the process so potential FIRPTA-related closing requirements can be identified and addressed before closing.
This information is provided for general educational purposes only and does not constitute tax or legal advice. FIRPTA requirements vary depending on the circumstances of each transaction. Buyers and sellers should consult a qualified tax professional or attorney regarding their specific obligations.