By: Jeremiah Jackson
My buyer is not a U.S. citizen so what do I do? I get this question a lot. The answer is: not much at all.
The better and uncommon question is: the seller is a non-resident alien so what do I do AS THE SELLING AGENT (you would think this is a worry for the listing agent, right)?
Buyers and sellers do NOT need to be U.S. citizens or permanent residents to invest and deal in real estate. The IRS gets theirs on the back end upon the sale. FIRPTA stands for Foreign Investment in Real Property Tax Act of 1980 as amended by Protecting Americans from Tax Hikes Act of 2015. The IRS puts it on the BUYER (and ultimately me as settlement agent) of real estate to collect up to 15% of the SALES PRICE (not the net proceeds to seller) and remit to the IRS within 20 days of closing or face late fees and tax penalties that quickly get into the thousands.
Part of every deed package we prepare includes an affidavit for the seller to complete and sign that ultimately reveals if we need to withhold the FIRPTA tax or not.
These are among the laundry list of exemptions to the 15% tax:
– Seller is a naturalized U.S. individual
– Seller is a resident alien (we ask for their green card)
– Buyer intends to occupy property as principal residence AND sales price is less than $300K
– Seller provides an IRS Withholding Certificate issued to me prior to closing
The third exemption above used to cover most situations where a FIRPTA withholding would otherwise be due before home values skyrocketed in the last decade. The last exemption is part of today’s public service announcement. Want to look extra special when you list a non-resident alien’s home? While it may be an uncomfortable question for you to ask about their citizenship or permanent residency status, it could save your client a lot of time and heartache. Instruct them to contact their CPA or tax preparer and complete IRS Form 8288B to apply for a Withholding Certificate. The earlier the seller can get out in front of this the better, as IRS wait times are long, and the certificate may not be available to the seller if they wait until the home is listed or under contract. This will put more money in their pocket up front AND greatly reduce the stress on the buyer (and my office) of any last-minute withholding surprises. The seller presents me with the Withholding Certificate exempting them from FIRPTA withholding collection, and I give them all their sales proceeds.
I do not decide what, if any, part of the withholding is owed as tax. I am merely a collection vessel for the IRS who later decides how much to keep and how much to refund the seller. I closed one recently where we had to withhold $75,000 on a $500,000 home. The seller’s proceeds were a little less than $100K so they were understandably flabbergasted that we had to mail most of their profit to the IRS for them to chase down.
With this knowledge, now you can Rest Easy.
