Many citizens from other countries want to own a vacation home in Walton County. If you work with foreign buyers or sellers you should be familiar with the rules found in the Foreign Investment in Real Property Transaction Act of 1980, commonly known as FIRPTA. Ignorance of FIRPTA can result in major problems at closing. However, knowing the basics can help to avoid those issues for your client.
The IRS taxes foreign transferors on the property's value. The IRS makes the transferee responsible for withholding 15% of the property's contract value until the IRS is satisfied that the transferor has met their tax obligations. We use the word "transferor" because FIRPTA applies to any disposition, including sales, gifts, and exchanges of real property.
In a real estate transaction, the transferee becomes the federal government's withholding agent. If the tax is not withheld, the transferee may become liable for any tax that is due. It is important, therefore, that the buyer understands the seller's nationality and tax status so the appropriate conditions are included in the contract and closing instructions. As long as all parties are aware of the requirement, it can be handled with minimal additional paperwork.
Exceptions to the Withholding Requirement
Even if the exceptions apply, it makes sense for Realtors to explain a buyer's options. If your client is the foreign national seller, then, again, it helps if they can plan ahead. The 15% withholding can be avoided if:
- The buyer intends to use the property as "a residence," rather than purely as a rental property. The term residence, in this case, means the buyer, or the buyer's family member, will occupy the property for at least half the time that the property is actually occupied, during the first two 12 month periods.
- The seller gives acceptable proof of their taxpayer status to either the buyer or the title agent.
- The IRS shows, prior to closing, that no withholding is required.
- The seller proves the transaction is covered by a "nonrecognition provision" in the Tax Code or in a tax treaty the USA has with the foreign seller's own country of residence.
- The seller's profit on the sale is zero.
If the buyer and seller are out-of-state, it adds to the need for forward planning.
Tax laws are complex. This is only a brief introduction. If you are the listing agent, and the seller is not a US citizen, you may want to either introduce the subject of FIRPTA to your client or ask us to do it for you. The seller will either know that 15% of the sale price will be withheld, or they will have time to give you the necessary details to avoid the withholding. When you pass the details to us, we will be able to work on the matter so all will be in place for closing.
If you are working with the buyer, and you know the seller is a non-US citizen, contact us and we can answer any questions you may have.