Legal Talk: What in the World is FIRPTA?

BY RICHARD S. POE
PARTNER, LANCASTER, TROTTER AND POE, PLLC

From Insight Magazine, a publication of NC REALTORS®

The following is a fictional (but very plausible) conversation between Betty Broker and Larry Lawyer:

BETTY: Hello, Larry. This is Betty. I hope your New Year is going well, and you and your family are dodging COVID so far.

LARRY: Thanks, Betty! How can I help you today?

BETTY: Well, I have a closing coming up with you in a few weeks in which I am the listing agent for Manuel and Consuela Ramirez, a lovely couple from Ecuador. They plan to return to Ecuador after selling their home here, and a friend recently told them that part of the sales price might be withheld from them at the closing. Why would that be?

LARRY: Well, Betty, there is a law known as the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA). In certain circumstances, a settlement agent is required to withhold a portion of the sales price from the seller at closing if the seller is not a U.S. citizen. There are many possible scenarios and many exceptions to the general rule, but it might be required.

BETTY: How do my folks find out if there will be withholding on their transaction?

LARRY: I am not a tax lawyer, so the Buyer and the Seller in this situation should be advised to seek tax advice from a qualified tax professional. However, here are several basic rules:

1. If the seller is selling to a buyer who intends to occupy the property as his or her principal residence and the purchase price is $300,000 or less, no withholding is required.
2. If the seller is a resident alien (holder of a green card), he or she is treated the same as a U.S. citizen and no withholding is required regardless of the purchase price.
3. If the seller applies for and obtains a FIRPTA Withholding Certificate from the IRS prior to closing, no withholding is required. Eligibility for a Withholding Certificate would be determined by a tax professional.

BETTY: Well, my sellers do not have green cards, and the house is selling for $500,000, so does that mean they will not get part of their proceeds following closing?

LARRY: Probably so, unless they qualify for a Withholding Certificate for some reason. But even if they do qualify, it’s unlikely the IRS would issue a Certificate in time for a closing in a few weeks. So, in all likelihood, I am going to have to withhold 10% (or $50,000) of the purchase price from the sellers’ proceeds and send it to the IRS. Once the sellers file the last tax return they are required to fi le, my understanding is they can apply for a refund of any of the withheld amount that exceeds their final tax liability.

BETTY: Wow! So, what do I need to put on my checklist so I adequately warn my clients in the future?

LARRY: Here are the questions that you need to know the answers to every time:

1. Is the seller a citizen of another country?
2. If so, does the seller have a green card?
3. Is the buyer going to use the property as his or her principal residence? If so, is the purchase price $300,000 or less?
4. Is the buyer going to use the property as investment property? In this case, if the seller is a citizen of another country and doesn’t have a green card, withholding is required no matter the price.
5. Does the seller qualify for a FIRPTA Withholding Certificate in the opinion of a tax professional?

BETTY: Thanks for the heads up. This is definitely going on my checklist. Is the anything else I should know?

LARRY: Just a couple of things to keep in mind:

1. If the sales price exceeds one million dollars and withholding is required, the withholding increases to 15% of the sales price.
2. The way the law is written, the buyer is responsible for making sure the withholding is done properly. So, if the withholding is not done properly or not delivered to the IRS within 20 days from closing, the buyer will be penalized and charged with late fees by the IRS. As a practical matter, since closing attorneys usually represent buyers, this liability would fall on the closing attorney.
3. Buyers and sellers in this situation are both advised to seek professional tax advice and not simply depend on your real estate attorney unless he is also a qualified tax expert.

Have a great 2021, and stay safe and well!!!