Time to Talk FIRPTA

FIRPTA has been around for along time, but today, it’s become something that Realtors are making an effort to make sure that their clients are fully informed about. FIRPTA is the Foreign Investment in Real Property Tax Act. It is a way for the IRS to collect capital gains from non U.S. citizens who are selling real estate, but don’t live in the United States.

It is particularly important to buyers because if not handled correctly, it has huge financial consequences.

FIRPTA requires that a non resident foreign person pay 10% (for sales of $300,000 to $1,000,000) or 15% (for sales over $1,000,000) of the sales price of the property to the IRS at closing. This will force the non resident foreign person to file a tax return to get back any money that was over collected.

It’s pretty logical. I’d say that there’s a high likelihood that if this was not done, that taxes owing as capital gain would never be collected because the person and the money would be outside of the United States.

So, this may seem pretty mundane, but here is the kicker. If the money is not collected and paid to the IRS, then it becomes a liability to the person who bought the house. Yes, people who seem perfectly innocent can then be hit with an IRS bill in the thousands of dollars. Not so mundane any more, right?

When handled correctly, buyers and sellers will see a disclosure about this issue right up front. Then an affidavit is signed by the home seller to state whether they are a non resident foreign person or not. This affidavit is held by the title company involved to be safe guarded for 6 years on behalf of the buyer of the home. It is a way to protect buyers by showing that every effort was made to comply with FIRPTA. When this is done, the buyer is not liable to the IRS.

This is one reason it’s a good idea to use a Realtor. We take classes and stay informed about issues that are important in the home buying process. We are here to make your experience smooth and successful in every way possible.

As always, thanks for reading the blotter.