Foreign Investor (FIRPTA) Navigation

We have had a rash of recent experiences with foreign sellers and their REALTORS® who were either unaware of FIRPTA or who had ignored it because they thought it would not apply to their sale. We have a great one hour presentation on the subject and thought we should synthesize that material here to help set people’s expectations properly when it comes to this often misunderstood federal tax.

1. What is FIRPTA?

FIRPTA stands for the Foreign Investment in Real Property Tax Act, which is found in Section 1445 of the IRS Code. In a nutshell, the Act provides that a transferee (i.e., buyer) of U.S. real property must withhold tax if the transferor (i.e., seller) is a foreign person.

When FIRPTA applies, 15% of the gross sales price must be withheld and remitted to the IRS within 20 days of closing using IRS forms 8288 and 8288-A. It is important to note that the withholding amount is 15% of the gross sales price and not 15% of the gain on the sale. According to the Code, the transferee (BUYER) is considered the so-called "statutory withholding agent" and is responsible for both the determination of whether FIRPTA applies and for the remittance of the withholding amount to the IRS. The Code imposes similar responsibilities on us as the title agent. And failure to comply with the Code can result in tax liability, interest and penalties.

2. What is a “Foreign Person” under the IRS Code?

Again, the Act applies that when a foreign person sells US real property. “Foreign person” is a technical term and is defined in the IRS Code. To wit, the Act defines "Foreign Persons" as:

  • Non-resident aliens (even with a social security number).
  • Foreign corporations that have not elected to be treated as domestic corporations.
  • Foreign partnerships, trusts or estates.
  • Disregarded entities (i.e., a sole member LLC) unless the LLC elected to be treated as a partnership or corporation.
  • NOTE: A resident alien with a green card is NOT considered a “foreign person” under the Act.

3. Who is the “Statutory Withholding Agent” under the Act?

According to the Act, the transferee or buyer of the foreign person’s US real property is considered the so-called "statutory withholding agent". As such, the buyer is technically responsible for both the determination of whether FIRPTA applies and for the remittance of the withholding amount to the IRS. Practically, the title company or settlement agent bears the same responsibility. As we will mention later in our Buyer Tips, it is very important for the buyer to know whether they are buying from a foreign person so that they may ensure the proper determination of whether FIRPTA applies and, if so, the proper remittance of the funds withheld. If the buyer does not, they could face tax liability, penalties and interest. Similarly, it is in the parties’ and the title company’s best interests that we perform a complete FIRPTA analysis for each transaction. Only by conducting this analysis can we ensure that each party is protected and avoid costly closing delays as often occur when sellers are surprised by the 10% withholding.

4. Are there exceptions to the withholding rule?

Yes! There are exceptions to the FIRPTA withholding rule. Here they are for your reference and consideration. It is imperative to read these carefully. Many of our most frustrated-by-FIRPTA clients are those who misunderstood the exceptions, thinking that an exception would apply when it fact it did not.

FIRPTA Exception: Non-Foreign Certifications

If an individual seller furnishes the buyer with a Non-Foreign Person Certification, then no withholding will be required. Similarly, if a foreign corporation that has elected to be treated as a domestic corporation and furnishes the buyer with a Non-Foreign Person Certification (Entity Transferor), then no withholding will be required. In an interesting twist, a disregarded entity (e.g., a single member LLC) will not be considered a Transferor. Instead, its OWNER will; therefore, a Non-Foreign Person Certification from a single member LLC will not be effective if the member is a non-resident and FIRPTA will apply unless the LLC elected to be treated as a domestic partnership or corporation.

An example of the non-foreign certification is attached for your reference.

FIRPTA Exception: When Sales Price is $300,000 or Less AND Buyer Intends to Reside

If the sales price is $300,000 or less, a Buyer may elect to execute an "Intent to Reside" certification which would eliminate the withholding requirement. The "Intent to Reside" is a statement that the buyer or a family member intends to occupy the property for at least 50% of the time the property is used by any person during each of the first two 12-months following closing. There is absolutely no obligation for the buyer to sign the Intent to Reside, inasmuch as failure to comply with the occupancy requirement could expose the Buyer to additional risk. The buyer has the sole discretion whether to rely on this exception.

An example of the Intent to Reside Certification is attached for your reference.

FIRPTA Exception: Withholding Certificates

A foreign seller can apply for an exemption from the 10% withholding by applying for a Withholding Certificate (IRS Form 8288-B) from the IRS prior to the closing date. Upon receipt of the evidence of the application, the title company can escrow the 10% after closing until such time as the IRS responds to the application. The title company can not and should not escrow the 10% without verification that the application has been filed.

Unfortunately, there is no way to determine how long the IRS will take to make a determination on the application. If the application is rejected, the title company must remit the escrowed funds within 20 days of the rejection letter.

A copy of IRS form 8288-B is attached for your reference.

5. FIRPTA Tips for Buyers and Buyers’ Agents

If you are buying US real property, you must first determine if the Seller is a foreign person as defined above. If they are, then FIRPTA may apply and you should consider these follow up questions which, importantly, depend on each other:

  • Is my purchase price $300,000 or less?
  • Can I certify under penalty of perjury that I intend to occupy this property for at least 50% of the time the property is used by any person during each of the first two 12-months following closing?

ONLY IF you are able to answer YES to BOTH of these questions can you rely on this exception. If the answer to either question is NO, then FIRPTA may apply.

6. FIRPTA Tips for Sellers and Seller’s Agents

For the REALTORS® out there, your first order of business is to learn about your clients. We recommend that as soon as possible - even at your listing appointment or presentation - you determine whether your seller is a foreign person as defined under the Act. If so, fantastic! This makes for a great time to show off your mastery of the subject and to prove just how valuable your services are. Whatever you do, DO NOT sow any seeds of misunderstanding or of wrongly set expectations by agreeing that FIRPTA will not apply because they aren’t making a profit from the sale.

For you sellers out there, your analysis should look like this:

  • Question 1: Am I a "Foreign Person" as defined by the IRS Code?
    •  If you are, then FIRPTA will apply unless one of the exemptions applies.
  • Question 2: Do any of the exemptions apply?
    • Exemption 1: Is the sales price less than $300,000? AND will the buyer sign off on an “Intent to Reside” certification?
      • REMEMBER, you must be able to answer YES to BOTH of those questions.
    • Exemption 2: Have I applied for a Withholding Certificate (IRS Form 8288-B) from the IRS prior to the closing date?
      • If you have evidence of your application, then the title company may hold the 10% withholding in escrow until they receive notification of the IRS’s determination. The silver lining here is that if the IRS determines that no tax is due, then we may remit the funds to you straightaway instead of you having to retrieve them from the IRS.

7. What Does Winged Foot Title Do to Help Navigate FIRPTA?

The best and most fundamental thing we do is ask the right questions at the right time. For example, we call sellers on new transactions on the same day we receive the new order. The purpose of that call is to get to know the sellers, which includes asking whether or not they would be considered a foreign person.

If our intake personnel suspect that the seller may be a foreign person, they trigger a full FIRPTA analysis. Our analysis begins with notification to all parties that the transaction may require FIRPTA withholding and an explanation of the Act. In those communications we ask the questions posed above to the appropriate parties. We calendar follow up on these questions so that we may make a determination of whether we believe FIRPTA should apply.

As you found above, we also support the parties by providing the necessary documentation to navigate the exemptions. Whether it is the Non-Foreign Certification or the Intent to Reside, we have the forms required and are happy to assist in their execution.

And ultimately, if FIRPTA should apply and if we are required to remit the withheld funds to the IRS, we will fill out the required forms and comply with the Act’s demands.

Call 239.985.4142 or contact us for a FREE Title Insurance Request today!

Serving Fort Myers, Cape Coral and Naples, Florida.

Winged Foot Tite, LLC is not associated with the government, and our [short sale orchestration] service is not approved by the government or your lender. Even if you accept this offer and use our service, your lender may not agree to change your loan.