COLVIN + HALLETT BLOG
Buying Real Property From A Foreign Seller or Closing the Deal? Know the FIRPTA Rules So You Aren’t Liable for Failing to Withhold
FIRPTA, or the Foreign Investment in Real Property Tax Act, is part of the United States’ continued efforts to tax all income/gain connected to the United States. Real estate agents, escrow agents, and buyers should be aware of FIRPTA because it mandates income tax withholding and paying over to the IRS 15% of the sales price on the purchase of a U.S. real property interest from a foreign person under certain circumstances. 26 U.S.C. § 1445. In other words, buyers may not be able to pay all of the purchase price to the seller—some may have to be paid to the IRS. This can include situations where a foreign person (or entity) sells, exchanges, liquidates, redeems, gifts, or transfers in any other way a real property interest. The obligation is imposed on a buyer as well as a buyer’s agent and/or settlement/escrow officer.
If a buyer/agent is required to withhold but fails to do so, the buyer and/or its agent and/or settlement officer could be liable for the tax if the seller fails to pay the United States the taxes due and owing from the sale. Thus, it is important for real estate professionals, escrow agents, and buyers to know about their obligations under FIRPTA, FIRPTA’s exceptions from withholding, and how to protect oneself as a purchaser/agent so the potential consequences of noncompliance with FIRPTA are avoided. It is also important for sellers to know the FIRPTA rules so that the mandatory withholding may be avoided if possible.
Step one is to determine whether the seller is a “foreign person” for purposes of the statute. That is because if the seller is not a foreign person, no withholding is required.
Buyers and their agents often ask how much due diligence they need to do to establish the foreign or non-foreign status of a seller to avoid potential liability under FIRPTA. Unfortunately, the regulations are silent with respect to the due diligence a purchaser must perform. However, the regulations are clear that a buyer may ask for a certification of non-foreign status, described further below, and if received from the seller, the buyer/agent may rely upon the certification and will not be liable for the tax unless they have actual knowledge that the information contained in the certification is false. Treas. Reg. § 1.1445-2.
Although a buyer/agent could make their own determination that the transferor is not a foreign person, the buyer/agent is not protected from liability if it is later determined that the transferor was a foreign person. Treas. Reg. § 1.1445-2(b)(1). Thus, the safest approach, if there is any question with respect to whether the seller is a foreign person, is for the buyer/agent to request a certification of non-foreign status. From the seller’s perspective, simply providing the certification avoids mandatory withholding.
There is no particular form or language required for the certification; as long as it contains the essential information (states that transferor is not foreign person, sets forth transferor’s name, identifying number, and home address for individual, and is signed under penalties of perjury), it is sufficient. Treas. Reg. § 1.1445-2(b)(2).
If the buyer/agent secures the certification from the transferor/seller, the buyer/agent may rely upon the form unless the buyer/agent has actual knowledge that the certification is false or receives notice from the transferor’s agent that the certification is false. Treas. Reg. § 1.1445-2(b)(4)(i), (iii), (b)(1). Usually, the buyer/agent will not have actual knowledge or even a reason to know the information in a certification is false, particularly given the complex definitions of whether an individual is a “foreign person,” which depends on residence status, treaty issues, green card status, visa acquired, physical presence in the U.S., etc. A buyer/agent is unlikely to know the answers to these questions. The buyer/agent should, however, review the certification carefully because if there is clear indication on the form itself that the person is foreign/does not qualify for the exemption from withholding, the regulations specify this information could constitute actual knowledge. Furthermore, Treas. Reg. § 1.1445-4(a), (c) imposes a duty upon agents to notify a buyer and the IRS in the event the agent knows the statement is false. If the agent fails to do so, the agent may be held liable for the tax that would have been required to have been withheld. Treas. Reg. § 1.1445-4(e).
In the absence of actual knowledge, however, the buyer/agent may properly rely upon the certification in electing to not withhold, which certification should be maintained for five years. At bottom, the safest approach for anyone who has any questions about whether or not to withhold is to request that the transferor provide a certification of non-foreign status meeting the requirements of the regulation before electing to not withhold the 15%.
There are other exemptions from FIRPTA, and other manners of addressing the withholding issue for foreign sellers. For instance, no withholding is required if a buyer purchases a residence and the sale price is $300,000 or less. Treas. Reg. § 1.1445-2(d)(1). Additionally, either party may obtain a withholding certificate from the IRS which can be used to reduce the withholding amounts on certain grounds. Treas. Reg. §§ 1.1445-2(d)(7), 1.1445-3, 1.1445-6. We will address these other areas in further detail in subsequent posts.
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