Foreign Investor In Real Property Act explained

Florida is arguably one of the most desired places in the world to live — certainly within the continental United States. The weather is great year-round, there are beaches and theme parks and art festivals, so one is never lacking in things to do (or not do) in the Sunshine State. Florida is a hotbed for international buyers and eventually, international sellers. 

The Foreign Investor in Real Property Act is a commonly misunderstood act, and because I run into situations with international sellers on a regular basis, I thought it would be a great topic on which to offer some clarity. Here are some of the basics on what you can expect when dealing with FIRPTA.

As a U.S. citizen if you don’t pay your taxes the government can take measures to obtain the monies owed them. It can be a bit trickier to collect those taxes if you are not a citizen of the U.S. and so FIRPTA is the solution to that problem. The Foreign Investor in Real Property Act requires that 15% of the sales price in all transactions be withheld when the seller of the U.S. property is not a U.S. citizen. There are some exceptions such as if the seller is a resident alien with a green card. 

So how does FIRPTA impact the buyer?

FIRPTA is not a tax but rather an amount withheld at closing to ensure any outstanding taxes owed by a foreign seller to the U.S. government are paid in full. 

Per attorney Shawn Berr, owner of Title Professionals Of Central Florida LLC: “A buyer needs to know there is a withholding requirement per IRS guidelines. Although the settlement agent is required to withhold a portion of the seller’s proceeds pending IRS determination, the buyer may be required to render these funds in the event the settlement agent fails to withhold the proper amount.” 

If the buyer does not withhold these funds at closing, he or she may be liable to the IRS to for the amount to be withheld plus penalties and interest. To be clear, the buyer does not pay an additional 15% or any percentage upfront at closing. The buyer is only liable for those funds in the event that the seller does not fulfill their obligations to the U.S. government in terms of taxes owed per FIRPTA.

But back to the numbers. Fifteen percent is always the amount withheld, right? That depends on a few factors — one being if the purchaser of the home is in fact buying the property to use as their primary residence. Under the Primary Residence Exemption, no amount is withheld in the event that the home will be a main residence, the sales price is under $300,000 and the buyer elects to waive withholding.

A more recent exception is the Reduced Rate Of Withholding, instituted Feb. 16, 2016, wherein the amount withheld is reduced to 10% when the purchaser will be using the property as their primary home, the purchase price is above $300,000 and below $1 million, and the buyer elects to waive withholding. So, if you are a foreign seller of a home in this price point, you are only subject to have 10% of the sales price withheld until the IRS has determined that you are up to date on all your tax responsibilities if your purchaser is a citizen intending to occupy the home as their main residence. The funds withheld at closing by the settlement agent are sent along with IRS forms 8288 and 8288-A within 20 days of closing to the IRS. It has been recommended by many that a seller obtain the assistance of a CPA to expedite the timeline of getting a determination from the IRS of funds owed and subsequently a return of any funds withheld above and beyond outstanding tax responsibilities.

Ultimately, it is always a good idea to have clarity regarding if you are going to be impacted by the Foreign Investor in Real Property Act or not prior to entering into a contract. A sellers disclosure will ask if the seller is subject to FIRPTA or not, so that is a good place to start. If you’re still not sure, inquire with your agent or title company whether the seller is a U.S. citizen. 

As a buyer, there is no need to fear purchasing a home in the U.S. from a foreign seller any more than a local one. 

Christina Rordam is a local Realtor with 12 years experience and a member of ORRAs Top Producer Club. For more, visit christinasellsorlando.com.