By Vanessa Saunders
FIRPTA, what the hell is that???!!!
It's an acronym for Foreign Investment in Real Estate Tax Act.
The FIRPTA tax requires a buyer to determine whether the seller of real property is a "foreign person" as defined by this little known Act. In essence, what that means, is the home owned by a "foreign person" i.e. a non-resident alien, (and not necessarily little green men!)
If the SELLER turns out to be a "foreign person", then the BUYER is responsible for withholding 10% of the sale price and forwarding it to the IRS. This is set up to ensure the seller doesn't "VANISH" before paying the FIRPTA tax due to the IRS on the gain from the sale.
This is where it get's really interesting: if the SELLER is a "foreign person, " and the buyer fails to determine that fact, and subsequently fails to withhold and forward the 10% tax to the IRS, then THE BUYER is LIABLE FOR 10% FIRPTA tax. YIKES!!!
You, your Realtor and most definitely your attorney need to know this stuff. Most agents, attorneys, or title companies in this area don't make this determination and neglect to withhold these funds. When I approached three local attorneys who my company deals with on a regular basis, I asked them who determines if the seller is a "foreign person?" None of the three had the answer... All of them essentially said to me "Well you are the international expert, don't you know?"
And that's my point. If you are a buyer, and if the seller is indeed a foreign person, you run a serious risk of liability to the IRS should you fail to determine and withhold.
So in a nutshell what you need to find out is that the seller of a home is a tax-paying U.S. citizen holding a valid social security number. If you don't know and you're a real estate professional involved in the transaction, it could cost you a hefty fine. But if you are the buyer, it can cost you a lot more, namely 10% of the sale price of the property!
Why does it seem the IRS always tries to find a way to have others do their job for them? No, this isn't a fair way to do it, But it's the law, and Realtors who don't facilitate getting things done properly can be fined up to the full amount of their commission. Even worse, they'll still be meeting that buyer around town, and they sure as hell won't be pleasant.
As a member of the Federation of International RE Brokers (FIABCI) we are taught to always remind the attorneys in a transaction to make some provision in the purchase contract requiring the seller to prove whether an owner is a foreign person or not. It's usually done by inserting a box requiring an affidavit together with their SSN. A statement in the agreement that, absent that affidavit and SSN, 10% will be withheld and sent to the IRS, facilitated by the title company. (BUT, it is the BUYER's responsibility to see that it gets done.)
However, if the seller provides a false SSN, supposedly the buyer is not accountable. As long as they try to comply they have no duty to verify. Let's hope that indeed is the case, and remains the law. Are there any exceptions? One for sure exists. If the buyer is buying a home for their personal residence, and the price is $300,000 or lower, it is an exempt transaction. Agents should have an affidavit from the buyer that it is to be their primary residence.
Finally, if your agent or their broker is stating that they are a member of FIABCI please ask to see their membership certificate or check online. There are only 300 bona-fide members in the USA and sadly many are trying to jump on the global bandwagon, stating they are members and showing the FIABCI logo. This is also the case with the Certified International Property Specialist Designation. Again check their documentation, or check with the National Association of Realtors.