When scrolling through listings and preparing yourself for the inevitable stress that comes with property purchase, you might stumble upon a property that will give you more headaches than you can imagine. But, If you get familiar with something called FIRPTA, the sale process might be a standard walk in the park.

Buying a property from a foreigner is a bit more complicated because of the federal law that obligates you, as the buyer, to withhold a certain amount of the selling price and send it to the IRS. In this article, we will talk all about FIRPTA procedures, forms, and circumventions.

Foreign Investment Real Property Tax Act

FIRPTA stands for Foreign Investment Real Property Tax Act. This act was initially enacted in 1980 to encourage foreigners to invest in the US and enable the influx of foreign money into the country.

Anyone can buy a property in the US, as long as they have enough money and they want to spend it in the States - no regulations exist to discourage such actions. However, FIRPTA’s quest was to eliminate the part when the foreigners sold the property, collected the gains, and took them to their native country.

So, knowing about FIRPTA comes in handy when buying a property from a foreigner or if you are a non-US citizen looking to buy, sell, or invest in the US real estate market. Of course, you are not alone in that process. You need a reliable and knowledgeable escrow officer and/or real estate agent to hold the money and help you along the way.

What Does FIRPTA Mean for the Buyer

A foreign citizen can buy a property in the US with no fuss or worries, and he is treated the same as any other buyer. So, for now, FIRPTA does not concern him. He does not need a green card, tax identification number, or residence status.

However, the buyer who is purchasing the property from a foreign citizen has to be aware of the responsibilities that come with it. Before opening the escrow, they are required to become a withholding agent and withhold a certain amount of the agreed property value.

After the sale is closed, the buyer has the responsibility to transfer that money to the IRS. The residual amount of the selling price they transfer to the foreign seller. In the next chapter, we’ll dive into the selling process and the obligations that the seller has before the closing.

Before that, it is important to note that the buyer holds responsibility for the withheld money. That means - a buyer is responsible for finding out if the seller is a foreigner or not. If he doesn’t have a social security number - he is a foreigner, and one part of the selling price goes to the IRS.

Buyer’s Declaration

The buyer’s responsibility in cases like this can become problematic if the seller has no ITIN number. To avoid or reduce the FIRPTA withholding, the buyer can sign the Buyer’s Declaration. Depending on the selling price and if the property serves as a primary residence for the buyer (or his immediate family) 50% of the time during the first two years, the withholding can be circumvented or decreased.

A buyer can avoid FIPTA withhold entirely if:

The selling price is less than $300,000

A buyer (or their family member) plans to live in the property for at least 50% of the time for two years after closing

A buyer will withhold only 10% if:

The selling price is between $300,000 and $1,000,000

A buyer (or their family member) plans to live in the property for at least 50% of the time for two years after closing

Total withhold, or a maximum of 15%, is required if:

The selling price is over $1,000,000

OR if the buyer doesn't intend to use the property as their residence, regardless of the sale price

If the buyer does not sign the FIRPTA declaration - the withholding will be 15% no matter the primacy of the residency or the price.

What Does FIRPTA Mean for the Seller

Although the seller technically owes the IRS a part of their proceeds from the sale, they are not responsible for the transfer. Even though this might seem inconvenient, this requirement ensures that the seller does not leave the country with the money before paying it to the US government.

But, you might wonder, how does one prove that they are or aren’t a US citizen? Upon opening a real estate escrow account, the escrow holder sends a FIRPTA affidavit for the seller to sign and state that they are an American citizen. If the seller isn’t a US citizen, they send the document back blank - stating that they are a “non-resident alien.”

Settlement agents (usually escrow holders) or withholding agents are not responsible for checking the accuracy of the document and will not be liable in case the seller has committed perjury. Their responsibility is activated only when the seller admits their foreign status.

Do You Need an ITIN Number to Buy a Property in the US?

One important thing to remember if you are looking into buying a property for cash as a foreigner is that you don’t need an ITIN number for now. However, you will probably need it after you’ve become a property owner, and you will most definitely need it once you’re trying to sell it.

An ITIN stands for Individual Tax Identification Number, and it is the way by which an IRS recognizes you. Without this number, you will be unable to pay taxes and get a return on your income.

Without this number, you cannot sell your property as a foreigner, as you might violate FIRPTA. Only if the buyer signs the declaration that they will make the property their primary residence and if the purchasing price is $300,000 or less can you skip creating an ITIN number - as you can avoid FIRPTA withholding.

Can You Claim a Refund?

Twenty days after the closing date is the time frame during which the buyer needs to send what is due to the IRS, along with two filled-out forms with all essential information - the seller’s ITIN is one of them.

The IRS then credits the seller’s account, and the seller has the right to a refund. He is eligible for a refund only if he:

1. Declared the sale of the property on an income tax return;
2. Included the copy of the forms the buyer sent to the IRS upon closing;
3. Had no other major financial activities in the US market.

How Does FIRPTA Look at Foreigners Married to Natives?

If you are a foreigner wanting to sell a property in the US and are married to a US citizen - the law looks at you as two unrelated individuals. Your spouse will not be withheld, but your proceeds are going to be required by the IRS.

What Is Important When Buying/Selling Under FIRPTA?

It doesn’t matter if you are the buyer or the seller - the most important thing you can do when entering a sale under FIRPTA is to find a good escrow agent. That is when Lightspeed Escrow comes onto the stage. You need more than just informed agents; what you need is an expert.

We are a team of experienced professionals with excellent knowledge of real estate law, who work towards eliminating inconveniences in the selling process. For any and all escrow needs or questions - contact us today, and we’ll assist you as soon as possible.