By: Jeremiah Jackson
I’m trying to distill the takeaways from my experience in handling thousands of closings over nearly 20 years of practice. So, this is a long but worthwhile read with a surprising twist that can affect buyers of NC property owned by foreign investors.
Ben Franklin had it right when he said, “In this world, nothing is certain except death and taxes.” Unfortunately for the IRS, this axiom did not always ring true for foreign sellers of U.S. properties. When foreign sellers of U.S real estate owed taxes on gains from a sale, the IRS could not collect unless a tax return was filed. Most of the time, the taxes went unpaid. To eliminate this loophole, Congress amended 26 USC Section 1445 in 1984, and placed the duty on the buyer to collect the tax by withholding funds from the sale.
The resulting Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) as amended by Protecting Americans from Tax Hikes Act of 2015 (PATH) requires any buyer (and me as closing attorney) of U.S. real property interest to withhold 15 percent (15%) of the amount realized (think sales price not the equity or gain). Example: $500K home sold and $350K owed on mortgage/closing costs – Seller would net $150K. However, the withholding of 15% of the amount realized (sales price) is $75K which I must send to IRS. The seller gets half of what they were looking for at closing and the other half must go to IRS for any refund. Why should you care? Surprisingly, it is the buyer’s burden! Failure to comply may result in the buyer of a foreign seller’s property being responsible to pay the entire withholding requirement plus penalties to IRS which could include an IRS lien placed against the property (which encumbers the buyer’s resale).
As part of every seller deed package we prepare, our sellers affirm whether they are U.S. citizens or permanent residents. Of course, there is no requirement of citizenship or residency to purchase or sell real estate. Below is a walkthrough we provide sellers who worry whether they are subject to withholding. It is important to remember that the withholding of seller’s proceeds is no indication that a tax is ultimately owed. That is between the seller, the Lord, and the IRS.
A seller is exempt from withholding if:
- Seller is a naturalized U.S. individual or married citizen
- Seller is a resident alien (has been issued a green card by U.S. Government. We do not factor any substantial presence tests. Use option #6 if you do not have an unexpired green card)
- Seller is a U.S. Corporation
- Seller is a Qualified Foreign Pension Plan
- Buyer intends to occupy the property as a principal residence and the Sales Price is $300,000.00 or less
- Seller provides a Withholding Exemption Certificate issued by IRS to Jackson Law prior to Closing
If you qualify for an exemption based on #1, #2, #3 or #4, then as part of the seller deed package you will complete a Non-Foreign Seller Affidavit swearing to the accuracy of your statements under penalties of perjury and felony charges and fines up to $100,000.00 and/or 3 years imprisonment. No withholding will be necessary.
#5 would not apply here as Sales Price is greater than $300K.
#6 is an option for many foreign sellers. I recommend hiring a CPA or tax attorney to complete IRS Form 8288B (Application for a Withholding Certificate). If you provide a Withholding Exemption Certificate issued by the IRS by Closing, then no withholding will be necessary.
If seller does not qualify for exemptions 1-6, or if you they are unable to obtain their Withholding Exemption Certificate issued by the IRS, then we will need to take the prescribed 15% withholding and submit to IRS. Keep in mind this is 15% of the sales price, not 15% of their equity/proceeds realized. Please note that this is in no way any indication that a tax is owed to the IRS, and seller may very well recoup some or all the withholding from the IRS. I am simply bound to withhold unless I am presented with a withholding certificate or signed FIRPTA affidavit.
With this knowledge, now you can Rest Easy.
