Foreign Investment in Real Property Tax Act
Congress passed the Foreign Investment in Real Property Tax Act (“FIRPTA”) in 1980. This law was enacted make it possible for the us government to stop foreign sellers from escaping the fees on transfers of real estate located within the United States. Foreigners were routinely collecting proceeds from sales, and not reporting the income/profit generated from the sale of that property. Under FIRPTA, the Seller is obligated to shell out 10% of the revenue price towards Irs, unless the vendor offers proof that either no taxes or perhaps a lesser amount is owed to the transfer. The Act further provides when the 10% is not paid, or otherwise satisfactorily addressed through the seller, a lien for 10% from the sales price automatically attaches on the property
The format and execution of the deed conform with Florida law. The deed is recorded, and all documentary stamps and real estate taxes are paid. 6 months later, Joe Buyer receives a letter from the Internal Revenue Service assessing him $100,000 for the transfer from the Seller. Mr. Buyer as expected now seeks legal services and asks “What is this letter about?” As a result of FIRPTA, Mr. Buyer learns he may now have to repay the internal revenue service $100,000.
If the Seller is a foreign individual (which includes foreign corporations as well as other legal entities), its standard practice for the closing agent to accomplish and submit the appropriate FIRPTA forms, along with 10% from the product sales price, to the IRS’ FIRPTA Unit-all within 20 days .
The 10% tax should be submitted whether or not the settlement statement reflects that the Seller failed to receive any money from the closing. If there are insufficient funds, the vendor must come “out of pocket” to pay this 10% obligation, or closing may not be completed. The vendor may reduce or eliminate that payment obligation by timely filing a withholding certificate with the IRS, which establishes that no taxes, or a reduced amount of taxes, are owed. Naturally, none of this was completed by Mr. Irish, and Joe now owes the IRS $100,000, or must otherwise justify to the IRS why that cash is not owed. Joe can seek reimbursement from the Seller. Unfortunately, the outcome of that request is extremely predictable.
There currently exists one exemption under FIRPTA associated with the payment of the 10% obligation by the foreign Seller. This exemption applies when the gross sales price is under $300,000; the property is residential in use; and, the customer signs an affidavit proclaiming that he (and his relatives) will live on the premises over fifty percent of the number of days that the property is occupied by anyone for residential purposes during all the two years following the purchase.
If ever the affidavit is proven to be fraudulent, the customer will likely then be obligated to pay for taxes he or she may not otherwise have been obligated to pay for if she or he had not signed the affidavit.
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