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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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