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