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What if my seller isn't a U.S. citizen?

I have heard that special tax rules apply to non-U.S. citizens who sell U.S. real estate. As a buyer, do I need to be concerned about whether or not my seller is a U.S. citizen?

ANSWER:

The special rules to which you refer were enacted by Congress in 1980 as the Foreign Investment in Real Property Tax Act (FIRPTA). This Act requires foreign investors in United States real estate to make certain disclosures or filings. The Act as written was difficult to implement and met with much criticism. In 1984, the Deficit Reduction Act repealed many of FIRPTA’s reporting requirements and substituted a requirement that the buyer deduct and withhold ten percent of the purchase price on the sale of United States real estate. Unless an exemption applies, the buyer will be exposed to liability under the IRS regulations if the buyer does not deduct and withhold the required amount.

So, yes, when the transaction gets to the closing stage, the buyer must be careful that the sale either falls within an exemption or that the required withholding is made. If a withholding is made, the buyer must report and pay the withheld amount to the IRS within ten days after the closing date using specified IRS Forms. This is usually done by the closing agent.

FIRPTA allows some exemptions. The most common exemption is if the seller is not foreign. The buyer can rely on a seller’s Certificate of Non-Foreign Status which is usually obtained at the closing. This is an affidavit in which the seller states under penalty of perjury that the seller is not a foreign person. In this Certificate, the seller also gives the buyer its name, address and tax identification number. Unless the buyer knows the affidavit is false, the buyer can rely on this affidavit and make no withholding. The buyer then will have no further liability even if the certificate turns out to be false. The buyer must keep this certificate for five years and make it available to the IRS upon request.

Another common exemption is when the buyer is acquiring the property for use as a residence and the purchase price is $300,000 or less. To qualify, the buyer must intend to live in the property for at least 50 percent of the days that the property is in use during the first two 12-month periods after the closing. If the buyer gives a false representation at closing or has a change in plans after closing that is interpreted by the IRS as not qualifying for the exemption, then the buyer could be liable for the tax if the seller does not pay it.

It is generally a good idea for the contract to set out a method for handling the withholding requirement. It is also important the closing documents show that an exemption applies. Otherwise a withholding must be made or the buyer will be exposed to liability if the foreign seller fails to pay the tax that might be due.

This information is not intended as specific legal advice to anyone and is based upon facts that change from time to time. Individuals should seek legal counsel before acting upon any matter involving the law.

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