FIRPTA – The Foreign Investment in Real Estate Property Tax Act, by Michelle Lind

Seller agrees to comply with IRS reporting requirements. If applicable, Seller agrees to complete, sign, and deliver to Escrow Company a certificate indicating whether Seller is a foreign person or a non-resident alien pursuant to the Foreign Investment in Real Property Tax Act (FIRPTA). Buyer acknowledges that if the Seller is a foreign person, the Buyer must withhold a tax equal to 10% of the purchase price, unless an exemption applies.

FIRPTA, the Foreign Investment in Real Property Tax Act, was enacted in 1980 and provides that if the Seller of real property is a foreign person, the Buyer must withhold a tax equal to 10% of the gross purchase price, unless an exemption applies. 26 U.S.C.A. § 1445(a). A foreign person is a nonresident alien individual; a foreign corporation not treated as a domestic corporation; or a foreign partnership, trust or estate. A resident alien is not considered a foreign person under FIRPTA.

There are numerous exemptions to the FIRPTA requirements. The most common exemption is when the seller furnishes a non-foreign affidavit stating under penalty of perjury that the seller is not a foreign person. 26 U.S.C.A. §1445(b)(2). Another exemption is a transaction involving the transfer of a property acquired for use as the buyer’s residence and the amount realized (purchase price) does not exceed $300,000. 26 U.S.C.A. §1445(b)(5). Under certain circumstances, a seller may obtain a “qualifying statement” from the IRS stating that no withholding is required. 26 U.S.C.A.§1445(b)(4).

Although FIRPTA generally provides that 10% of the purchase price must be withheld, the amount withheld should not exceed the seller’s maximum tax liability. 26 U.S.C.A. §1445(c)(1). The seller (or buyer) can request the IRS to determine the seller’s maximum tax liability with respect to the sale.

A real estate broker or salesperson (“broker”) for either party can be held liable for the tax that should have been withheld (up to the amount of compensation received), if the broker has actual knowledge that the non-foreign affidavit is false and fails to notify the buyer and the IRS. 26 U.S.C.A. §1445(d). Under certain circumstances, the broker may also be liable for civil or criminal penalties.

Any necessary withholding should be accomplished by requiring the escrow agent to withhold the required funds. The escrow company should be instructed to send the funds to the IRS at close of escrow. Additional information regarding this issue may be obtained in IRS Publication 515.
Department of the Treasury/Internal Revenue Service — Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Corporations

The foregoing is for informational purposes only and is not intended as definitive legal or tax advice. Transmission of this information is not intended to create, and receipt does not constitute, an attorney-client relationship. You should not act upon this information without seeking independent legal counsel. If you desire legal advice, tax or other professional advice, please contact your attorney, tax advisor or other professional consultant. Furthermore it is advisable for the foreign purchaser outside the United States to consult “Cross Border Professionals” for both legal and tax advice prior to making a real estate purchase or sale in Arizona. These professionals are available in Phoenix and your home country. If you need referrals your real estate agent or broker can provide them if requested.

Please note: this article is of a general nature and may not be updated or revised for accuracy as statutory or case law changes following the date of first publication. Further, this article reflects only the opinion of the author, is not intended as definitive legal advice and you should not act upon it without seeking independent legal counsel.