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FIRPTA: The Foreign Investment in Real Property Tax Act

Posted by Benjamin Dona on Thursday, December 15th, 2011 at 10:36am.

FIRPTA: The Foreign Investment in Real Property Tax ActThe following is a brief review of the requirements of the Foreign Investment in Real Property Tax Act. Known as FIRPTA, the act requires that a buyer of real property in the United States must withhold 10% of the gross sales price and send it to the IRS if the seller is a "foreign person."  A foreign person is described as a non-resident alien or a foreign corporation that has not made an election to be treated as a domestic corporation. It does not include a resident alien that holds a "green card."

Under the Act's guidelines, a seller of real estate must furnish the buyer with a "non-foreign affidavit"  stating that the seller is not a foreign person. The affidavit must also include the seller's taxpayer identification number (in most cases their social security number). An alternative (exemption) is to use a qualified substitute such as an escrow company, an attorney or a title company that is responsible for closing the real estate transaction. If the qualified substitute provides a statement that they are in possession of the tax identification number or provides an affidavit stating the seller is not a foreign person, then the buyer is relieved from the tax withholding liability.

Another exemption includes the following criteria - you (the buyer) acquire the property for use as a residence and the amount realized (generally the sales price) is not more than $300,000. You or a member of your family must have definite plans to reside in the property for at least 50% of the number of days the property is used by any person during each of the first two 12-month periods following the date of transfer. When counting the number of days the property is used, do not count the days the property will be vacant.

The one thing a buyer does not want to do is to take on the liability of closing the sale without the affidavit if there is any possibility of the seller being a "foreign person."  Doing so could put you on the hook to the IRS for the10% withholding, or the capital gains tax due on the sale, whichever is less.

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About the Author

Gulf Coast Associates, RealtorsBenjamin Dona is the Broker and Owner of Gulf Coast Associates, Realtors in Bonita Springs, Florida. He holds two advanced degrees, an MBA and an MA, and has an extensive background in both business and marketing. In 1998, he founded Gulf Coast Associates, and formed a group of like-minded Realtor® associates dedicated to offering professional Southwest Florida real estate services by concentrating on information, education and the use of leading edge technologies. He also is a recognized expert on the "Net," a much-quoted and read blog author, and a contributor to both national and international news outlets. Benjamin is a member of the National Association of Realtors, the Florida Association of Realtors, and numerous local real estate boards throughout Southwest Florida.

Contact Benjamin Dona at 239-948-3955

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