The Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) requires that the “buyer” (and the closing agent) withhold 10% of the “amount realized“ from property sold by a non-U.S. citizen / non-U.S. income tax resident (“foreign seller”) and remit it to the IRS within 20 days of the sale. The foreign seller can then request a refund of the withholding by filing a tax return with the IRS for the taxable year of the transaction.
The key definition in the rule is the “amount realized“. The IRS Regulations say, “The amount realized by the transferor (seller) for the transfer of a U.S. real property interest is the sum of:
(i) The cash paid, or to be paid; and
(ii) The fair market value of other property transferred, or to be transferred; and
(iii) The outstanding amount of any liability assumed by the transferee or to which the U.S. real property interest is subject immediately before and after the transfer.”
Buyer occupied <$300k: There is an exception if the amount is less than $300,000 and the buyer intends on occupying the property at least 50 percent of the time the property is used by any person in the 12 months following the date of the sale. [IRS Regulation 1.1445-1(a)(4)].
Non-foreign Affidavit: The buyer may also rely on an affidavit from the seller that the seller is not a foreign person, and stating the seller’s name, home address, and US taxpayer identification number. The buyer / closing agent should be sure the facts contained in the affidavit are true
Withholding Certificate: prior to closing, the seller can obtain a withholding certificate from the IRS (usually takes 30-45 days). The certificate will state the amount to be withheld. The IRS states (off the record) that it is not demanding withholding on short sales. Here is the Application for withholding certificate.
Deed in Lieu
IRS Regulation §1.1455-2(d)(3)(B) provides that the buyer or transferee (the lender taking back the property) must withhold 10% of the amount realized EXCEPT: (1) the transferee is the only person with a security interest; and (2) no cash or other property is paid to any person in respect to the transfer (except usual closing expenses); and (3) the related notice requirements for the transfer are satisfied.
The amount realized would be the sales price plus the amount of debt forgiven. The settlement statement should show 10% of that amount as withheld until the seller is able to obtain a withholding certificate. It should be noted that is unlikely that the lending being short paid would consent to 10% of the proceeds going to the IRS. However, if the withholding certificate is not obtained in time for the closing, the parties could execute an escrow agreement providing that if such funds are not required to be sent to the IRS, they be remitted to the lender.