IRS FIRPTA Implications at Closings

The Following is Provided by the IRS Regarding FIRPTA

When a real estate transaction involves a foreign seller, complex tax implications may arise. Key among them is the Foreign Investment in Real Property Tax Act (FIRPTA). This law requires that the buyer withhold at least 15 percent at closing as a deposit against the seller’s tax liability, which is intended to serve as an estimate of the capital gains taxes due. However, FIRPTA still applies even when the property is sold at a loss. The seller may later obtain a full or partial refund when filing a tax return at the end of the year.

When Does FIRPTA Apply?

FIRPTA’s withholding requirement applies when a real estate transaction involves foreign sellers — both individuals and certain business entities. In general, when the seller is a foreign corporation, foreign trust or single-member LLC with a foreign member, FIRPTA comes into play. When an LLC is the seller of the property, whether FIRPTA applies will be determined by the residency or foreign status of its member(s), regardless of whether the LLC itself is based in Florida or another U.S. state. The law covers both residential and commercial transactions. There is a limited exception for residential property under a certain dollar threshold that will be used primarily for personal purposes.

Navigating Real Estate Withholding Tax Requirements: The Importance of Being Prepared

Whenever the seller is a foreign individual or entity, it’s important for both parties to consult with an attorney well in advance of closing to analyze potential FIRPTA implications. Being prepared can reduce the risks of complications at closing. For example, in some cases, the amount withheld may be less than 15 percent if the seller obtains a withholding certificate from the IRS in advance of closing. For the buyer, failure to comply with the FIRPTA withholding requirements could result in substantial liability. Thus both sides have a strong financial incentive to sort out FIRPTA issues before closing. Both buyers and sellers can protect their rights by proactively dealing with FIRPTA issues well in advance of closing.

Get Thorough Guidance from an Experienced Real Estate Attorney

At the Broward-based law firm of Mila Abosch, we are intimately familiar with the complexities of FIRPTA. Attorney, Mila Abosch provides detailed legal guidance to help buyers and sellers avoid pitfalls. She can assist you in identifying whether FIRPTA applies and, if so, she will walk you through its requirements. Learn more by calling 954-371-0025 or reaching out to us online for a free consultation. We handle complex commercial and residential real estate transactions across South Florida.