Foreign Sellers - Buyer’s Ignorance is Not Bliss
By Jim Palmer Jr.

Buyers should be aware of a law concerning non-citizen, non-resident sellers that can put them at risk if they are unaware.  Even though this tax law affects very few transactions in our state, it is important to know the consequences since the penalty could be severe.  The basis of the law is simply this, if a seller is a non-citizen, non-resident of the United States and the non-resident fails to pay the required capital gains tax at the time of sale, then the buyer is liable for paying those taxes.   Sounds crazy right?

The Foreign Investment in Real Property Tax Act (FIRPTA, 26 U.S.C. 1445), provides that a buyer of a U.S. real property interest must withhold tax if the Seller is a foreign person, unless one of the exceptions in the Act applies.  The law applies to foreign corporations, partnerships, trusts, estates and other foreign entities, as well as to foreign individuals.  A real property interest includes full or part ownership of land and/or improvements, leaseholds or options.  If the seller is a non-resident alien, and has not obtained a release from the IRS, then the closing agent must withhold 15% of the realized amount from the sale and pay it to the IRS, UNLESS the buyer certifies that the purchase price is less than $300,000 and that buyer has definite plans to reside on the property at least 50% of the time within the first two years of purchase.   If the amount of the sale is more than $300,000 but not exceeding $1,000,000 and the buyer certifies that they will be living at the residence for at least 50% of the time in the first two years, then the tax withheld is 10%.

Think about it, if the sales price is $350,000 and the seller is obligated to pay $35,000 in taxes, but for some reason the foreign seller does not pay, then the buyer is obligated to pay that tax.  Makes you want to pay attention to the citizenship status of any seller, aye (that’s Canadian for huh)?

Newly revised Purchase and Sale Agreements require that sellers disclose and warrant their citizenship status at point of sale.  If seller is a non-citizen, they are required to execute a certificate (Realtor® form 22E) at closing and provide that to the Closing Agent.  The Closing Agent is instructed to withhold and pay the required amount to the IRS.