When engaging in a real estate transaction, buyers and sellers have many responsibilities. One responsibility that may seem counter-intuitive and even unfair is that in a particular circumstance the buyer is responsible for withholding, reporting, and remitting to the Internal Revenue Service the Seller’s taxes on money realized from the transaction.
This circumstance is when the seller is a foreign entity, whether an individual or corporation. The requirement to withhold the tax, the rate at which to hold, and the procedure for remitting the tax to the IRS are spelled out in the Foreign Investment In Real Property Tax Act of 1980 (FIRPTA) and is commonly referred to as the FIRPTA tax. See the IRS webpage regarding FIRPTA withholdings here.
In the typical real estate transaction, both buyers and sellers are represented by a closing agent and/or an attorney. The closing agent or closing attorney will assist the parties to ensure all requirements are meet for a successful transfer of the property from seller to buyer in accordance with the parties’ contract, ensuring the buyer receives a clear title and the seller receives the benefit he bargained for.
Early in the transaction, the closing agent will inquire if the seller is a foreign entity. If the answer is no, the closing agent will require the seller to sign an affidavit attesting to the same. If the seller is a foreign entity, then the closing agent will withhold the required tax, which generally is 15% of the “amount realized.” The amount realized is the sum of: 1) the cash paid, or to be paid (principal only); 2) the fair market value of other property transferred, or to be transferred; and 3) the amount of any liability assumed by the transferee or to which the property is subject immediately before and after the transfer.
If the property transferred was owned jointly by a U.S. and foreign entity, the amount realized is allocated between the transferors based on the capital contribution of each transferor.
The IRS puts the burden of withholding and remitting the tax on the seller. Presumably, because the person or entity now holding property in the U.S., even if they themselves are a foreign entity, is easier for the IRS to seek enforcement against than a foreign entity which once the property is sold, may or may not be responsive to inquires and request from the U.S. IRS. This responsibility on the buyer goes as far as holding the buyer personally responsible for the tax if it is not properly withholding and remitted. This means the buyer would end up paying an extra 15% (at least) for the property.
A knowledgeable real estate attorney can help you navigate this and many other unforeseen situations in the real estate transaction process. The attorneys and staff of Trinity Title, LLC and Boatman Ricci, P.A. are knowledgeable and experienced not only at navigating various residential and commercial real estate transactions but also at addressing potential litigation issues that may arise from the real estate setting. Contact us at (239) 330-1494.
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