From time to time, we get calls from sellers or their realtors who want to challenge a standard form in a seller document package. The form requires a seller to identify that that seller is either (a) a US citizen, (b) a resident alien (green card) or (c) a “US person” as defined by the IRS. These realtors and sellers are generally questioning whether it is any of the Immigration and Naturalization Service business as to what their status is. They also question what “FIRPTA” is, anyway.
As confusing as it may seem, FIRPTA has nothing to do with immigration. It is a tax issue. The Foreign Investment in Real Property Tax Act (FIRPTA) calls for withholding a portion of the seller’s proceeds for tax purposes. If the seller(s) do not fall into one of the three categories above, a portion of the sales price of the property (generally 15%) must be withheld by the closing attorney and submitted to the IRS within 30 days from the date of closing. Once the money is sent, sellers can apply to the IRS for the return of this money.
The trickiest part of this law is that it puts the obligation on the BUYER to withhold and submit the money – not the seller. Failure to do so will result in fines and penalties to the buyer and not the seller. For this reason, closing attorneys, who represent the buyer in a closing, will bend over backward to make sure the money is withheld, if necessary. There are exceptions to this withholding requirement, but it is the closing attorney who will determine whether those exceptions will apply in that particular situation.
For sellers and listing agents, the most important thing, then, is to make sure that the sellers are prepared for FIRPTA if it will be an issue when they are selling. If they are citizens or resident aliens, it does not apply. If they are not (here on a visa, for example), they will need to see if they qualify as a “US Person”. They should discuss their eligibility with an accountant or tax lawyer, and, if they do qualify, they should apply for a certificate from the IRS. None of this is quick, so you should have sellers begin the process early.
Putting the property into a corporation or an LLC does not solve this issue. FIRPTA looks at the ownership of the company to determine applicability. So, for example, if an LLC is owned 50% by a citizen and 50% by a person who does not qualify under any of the above 3 categories, FIRPTA withholding will have to be done on 50% of the sales price.
In a nutshell, FIRPTA is a confusing and dangerous law. An attorney and/or accountant should always be consulted.
Revolution Law Group is located in Greensboro, NC, and serves individuals and small businesses throughout the Triad and surrounding areas. To contact us please visit Revolution.law or call 336-333-7907.
The information included here is for informational purposes only, is not exhaustive of all considerations when creating documents, is not intended to be legal advice, and should not be relied upon for that purpose. We strongly recommend you consult with an attorney and do not attempt to create your own documents.