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The IRS Rule That May Cost You 15% FAILURE TO PROPERLY HANDLE FIRPTA WITHHOLDING CAN LEAVE BUYERS RESPONSIBLE FOR A HEFTY TAX BILL.
GAYLENE ROGERS LONERGAN
D id you know real estate buyers in the U.S. are required to ensure the seller is either a U.S. citizen or has a U.S. government-issued tax identification number? Otherwise, the buyer could be responsible for a 15% tax bill to the IRS, based on the Foreign Investment Real Property Tax Act (FIRPTA) established in 1980. The purpose of the law is to ensure all foreign investors pay the IRS the taxes due based on gains from the sale of U.S. real property. THE CHALLENGE If the seller is not a U.S. citizen or does not otherwise have a tax ID number issued by
the U.S. government, then the government holds the buyer responsible to have the necessary exemption documentation, or the buyer must withhold up to 15% of the gross proceeds and pay it directly to the IRS. If the money is not withheld according to this law, the buyer may also be required to pay penalties. Normally a buyer satisfies this requirement by having the title company obtain an executed and completed Evidence of Non-Foreign Status form from the seller. This form must include the seller’s U.S. taxpayer ID. This typically settles the matter unless the seller is indeed not a U.S. citizen or does not have a tax identification number. If the seller
does not have the required tax ID number, then unless the seller is willing to have the buyer withhold 15% of the gross proceeds from the sale, the seller must file certain documentation with the IRS, which can delay the sale of the property. FIRPTA EXEMPTIONS Many real estate investors and the professionals who advise them are aware of certain exemptions to the law, such as a personal residence exemption (depending on the price of the sale), a withholding certificate, and affidavit of non-foreign status. An often-missed requirement, however, is related to a potential foreclosure. If a
12 | think realty magazine :: march - april 2025
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