Foreign Sellers Tax Act of 1980 FIRPTA

Posted by Matthew Lahti on Monday, March 4th, 2013 at 12:22am

If You're Not a Resident of the United States it's Important to Know the Laws When You Purchase a Home.  The Foreign Sellers Tax Act of 1980 FIRPTA Covers the Rules.

The United States has been a prime real estate market for the global community for many years but it’s only fairly recently that the Internal Revenue Service (IRS) passed rules that allow the government to obtain advance payment of any capital gains tax due following the disposition of foreign-owned property.

The Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) requires a buyer to withhold an amount equal to 10 percent of the purchase price at the time of closing the sale of a property owned by a foreign seller. It’s the responsibility of the buyer to find out if the seller is a foreign person. If the money is not withheld, the buyer may be held liable for paying the tax. For this reason, the real estate agent who lists the property for sale should indicate on the listing if the seller is a foreigner.

The collected money must be sent to the IRS within 20 days of the closing. In reality, the title company or attorney will usually handle the paperwork and money transfer, but the IRS will hold the buyer responsible if it’s not done.  If the 10 percent proves to be less than the tax, the seller is liable for the difference. If the money is more than the capital gains tax, the seller can apply for a refund. To avoid overpaying, either the seller or buyer can apply for a withholding certificate prior to the closing and request permission to withhold an amount that more accurately reflects a lower tax amount.

There are exceptions to the rule. Vacant land, for example, is never subject to withholding and  properties that sell for $300,000 or less to a buyer who intends to use it as a personal residence for at least 50 percent of the time during the first two years are also exempted as long as the buyer signs an affidavit under penalty of perjury that they meet the qualifications for exemption.  The seller, however, is not exempt from paying taxes on the gain.

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