The US Foreign Investment in Real Property Tax Act, or FIRPTA, is what it stands for. In the past, the IRS couldn't get money from foreign sellers of U.S. real estate who owed taxes on gains from a sale unless the seller filed a tax return. Most of the time, the taxes were not paid. Congress tried to fix this problem by making it the buyer's job to pay the tax by taking money out of the sale. If the buyer doesn't withhold tax from a foreign seller, the buyer could be held responsible for the tax.

FIRPTA is not a tax; it is a tax withholding. Withholding is when a certain amount of money is set aside to pay possible taxes. Foreign sellers have money taken out of their payments by the IRS to make sure they pay their fair share of FIRPTA tax refund on real-estate. In other words, the IRS will "hold hostage" the possible tax until the seller files a tax return to show what they actually owe. There are a lot of title companies that will keep these funds.

The IRS FIRPTA withholding law looks at property purchases on three different levels:

  • A personal residence worth less than $300,000: Foreign sellers don't have to pay FIRPTA tax right now if the property was used as a home.
  • A personal residence worth more than $300,000 but less than $999,999 – If the property will be used as a home, there is a 10% FIRPTA tax.
  • The FIRPTA tax is 15% on properties worth $1 million or more. It doesn't matter if the property is going to be a home or not.

Under FIRPTA, a "foreign person" is any of the following:

  • nonresident alien individual,
  • foreign corporation,
  • partnership,
  • trust
  • foreign estate

Through the FIRPTA withholding process, Sellers can apply for a Withholding Certificate that could lower the amount that is withheld, and in many cases, it can be reduced to zero. Even if the Sellers have to pay some taxes, they may be able to deduct closing costs, improvements they made to the property, and other expenses when they file the request for the Withholding Certificate with the IRS. This lets foreign sellers find out ahead of time if they owe anything, so that no money is taken out of their pay, or at least get that amount lowered.

If the Seller does nothing about a Withholding Certificate before the closing, the FIRPTA Accounting Tax services will take the right amount out of the sale proceeds at the closing and send it to the IRS. The foreign Seller can file an income tax return at a later date to get back some of the money that was taken out.

There are some exemptions that mean this tax should not be taken out, but you should talk to your CPA about them to see if the seller qualifies. If you have questions about taxes, it's best to talk to a CPA, a tax pro, or an attorney.