FIRPTA. The Foreign Investment in Real Property Tax Act
When you are preparing to buy or sell a home in the US, it is important to understand your obligations with FIRPTA, the Foreign Investment in Real Property Tax Act. If the seller is considered a “foreign person” as defined by the Internal Revenue Code, the buyer may be subject to tax withholding obligations. It is important to understand that the obligation of enuring this tax is withheld at closing falls upon the buyer and not the title company handling the closing.
While we do not see this withholding all of the time, we do see it more frequently than some other markets due to the diverse nature of our real estate market in Cape Coral,.
What is FIRPTA?
FIRPTA stands for the Foreign Investment in Real Property Tax Act of 1980. It is essentially a way to collect capital gains that may be owed from foreign investors when a property is sold. When the property is sold, up to 15% of the gross purchase price is withheld at closing and held in escrow and used to pay any taxes that are owed by the seller. Sellers are advised to seek guidance from a tax professional specializing in FIRPTA withholdings to ensure a smooth transaction.
If I’m buying a home and I am a US person, how does this apply to me?
At closing, it is the buyers responsibility to ensure that the funds are withheld. Sellers are required to disclose if they are a foreign person when listing their property for sale, so buyers will be aware. Your real estate agent will inform you and guide you if FIRPTA will apply during your transaction. If you do not ensure that the funds are withheld, you, the buyer, can be held responsible for the taxes due from that seller.
If FIRPTA applies to me in either selling or buying, what should I do?
I recommend that if FIRPTA applies to you as a seller or a buyer, I recommend to consult a local tax consultant who specializes in FIRPTA withholdings. Real estate agents are not permitted to give you any tax and/or legal advice.
You can contact me for a list of consultants in the area
You can learn more about FIRPTA withholdings on the IRS website.
Originally Published on June 29, 2017, Edited on February 1, 2024