FIRPTA and Foreign clients- What Real Estate Agents Need to Know

At Hutchens Law Firm, we have quite a few real estate agents that represent foreign investors in the acquisition and sale of real property in North Carolina. What many agents and foreign clients do not realize is that there may be tax implications when the client goes to sell the property.

The Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) imposes income tax on any foreign person selling real property in the United States.

FIRPTA was enacted in an effort to restrict lost capital gain tax revenue from the sale of real property by foreign individuals or entities. The IRS makes it the responsibility of the buyer to withhold a potential income tax in the amount of 10% of the gross purchase price, even if the sale is at a loss. If a withholding is not made by the buyer, the IRS will hold the buyer liable for the tax.Bess_Reynolds_-_Profile

In order to protect buyers, sellers are required to sign a FIRPTA Affidavit at closing stating that they are not a non-resident alien for purposes of U.S. income taxation. There is always confusion as to who qualifies as a foreign seller and what exceptions apply. Generally, the seller must be either a U.S. citizen or resident alien with a green card to be exempt from the FIRPTA withholding.  Once the buyer is provided an executed FIRPTA Affidavit from the seller stating they are not a foreign individual or entity, the buyer is released from the withholding requirement.

If a seller is a non-resident alien, there are exceptions in which the seller would not be taxes; for example:

  1. The individual buyer signs an affidavit stating the property is selling for under $300,000.00 and that they intend to occupy the property. If the buyer chooses not to sign an affidavit the withholding is necessary.
  2. The seller obtains a withholding certificate from the IRS permitting no withholding if the transaction has no taxable or realized gain. It is important to note this process can be long and should be started well before closing.

In order to avoid any surprises at the closing table or in the future, agents should always be aware of a client’s foreign status. Once you have confirmed their status as a non-resident alien, you should recommend they seek the advice of a tax expert or tax attorney before they partake in a real property transaction. If an exception applies, a tax expert can advise them accordingly.

Ultimately, whether they are acquiring or selling properties in North Carolina, your clients will need to know the implications of FIRPTA