What is FIRPTA? Understanding the facts about FIRPTA

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Real Estate Agent with Berkshire Hathaway HomeServices 01238708
https://activerain.com/droplet/C8t

What is FIRPTA? Understanding the facts about FIRPTA

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FIRPTA is the acronym for Foreign Investor Real Property Tax Act. The disposition of US Real Property interest by a foreign nations is subject to the Foreign Investment in Real Property Tax Act of 1980 (also know by most as FIRPTA) income tax withholding. Basically what it means is that the United States is authorized to tax foreign person on the sale of US Real Property.

If you have a Foreign National who is selling Real Property at least in California, most Escrow Companies will follow the instructions of the principals in withholding and remitting the payments to the Internal Revenue Service (IRS) on their behalf.

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Most reputable Escrow Companies will have a process in place for accommodating the ability “to hold back funds” if the seller has applied for a Withholding Certificate.

On the other hand keep in mind not all Escrow Companies comply to the FIRPA  requirement, hence it is imperative if you are representing a seller who is a foreign national in a transaction that you protect your Broker, yourself as well as the interest of your government.

The last thing you want is a call from Uncle Sam that you did not protect their interest. Just saying check with your Broker as well your legal advisors so that you do not bring Pecuniary Liability on yourself.

If you are a consumer who is considering buying or selling a home, investment real estate, vacation homes, or beach properties in Southern California, Los Angeles, Century City, Westwood, West Hollywood, Beverly Hills, Culver City, Marina Del Rey, Venice or Malibu. Feel Free to give me a call at 310.486.1002 email me at homes@endrebarath.comor visit one of my websites at http://www.endrebarath.com Your Pet Friendly Realtor. I contribute a portion of my commission to Local Animal Rescue Organizations.

 

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Rainmaker
908,388
Pamela Seley
West Coast Realty Division - Murrieta, CA
Residential Real Estate Agent serving SW RivCo CA

Hi Endre, out of habit I always get a FIRPTA when I take a listing. It's usually a broker required document and buyer disclosure. Good post, love your graphic! 

Jun 07, 2012 04:29 PM #20
Rainmaker
589,571
Phil Leng
Retired - Kirkland, WA
Phil Leng - Retired

Hi Endre,

You have taken a common knowledge item and explained it very well for those who don't know.

Good job

Phil

Jun 07, 2012 07:49 PM #21
Rainmaker
1,367,527
Michael Setunsky
Woodbridge, VA
Your Commercial Real Estate Link to Northern VA

Endre, this is some important information. If the escrow company doesn't hold the funds, it could become the responsibility of the broker to comply.

Jun 07, 2012 11:22 PM #22
Rainmaker
526,069
Mike & Eve Alexander
Buyers Broker of Florida - Orlando, FL
Exclusively Representing ONLY Orlando Home Buyers

Be aware that if the title company misses FIRPTA and does not collect the debt, the tax debt is transferred to the new owner....the buyer.

 

Eve in Orlando

Jun 07, 2012 11:49 PM #23
Rainer
369,545
Kate Akerly
Kaminsky Group - Manhattan Beach, CA
Manhattan Beach Residential Sales

Just to be clear, FIRPTA is not a tax.  Its is a law that requires withholding of proceeds to ensure that the foreign seller pays their capital gains tax.  If you work with foreign clients, it's important to be able to explain to them that they're "not subject to a 10% tax because they're a foreign person" as insinuated above.  That would be a disincentive to investing here and I would hope a broker wouldn't make that mistake and potentially lose a client!  The IRS just wants to make sure that the capital gains tax is paid.  The actual amount owed, if any, is computed at a later date.  Note, there is a mechanism for the seller to ask for an accounting of the amount owed at the time of sale by requesting a "withholding certificate."  If the disposition resulted in a loss or the gain is less then 10% of the proceeds, the 10% withholding may be avoidable.  

Further, there are ways to legally avoid this withholding through the use of business entities.  It's not as simple as using an LLC as someone else suggested because if the majority owner(s) of the LLC are foreign nationals, FIRPTA applies.  However, if a domestic corporation is the sole owner of the domestic LLC, then FIRPTA would not apply.  The shareholders of the corporation could be foreign persons.  Of course, speak with your tax attorney and/or CPA about setting up such an investment vehicle.

Jun 07, 2012 11:57 PM #24
Rainer
83,357
Tom & Lisa Slaughter
Century 21 Coast to Coast, Clearwater Beach, FL - Clearwater Beach, FL

WoW to "Eve in Orlando". I'm on the Gulf of Mexico beaches and we have A LOT of "foreigners" buying and selling here.  Are you SURE that the debt is transferred to the new owner? I'm going to have to check on that!

Thanks for the post, Endre!

Lisa

Jun 07, 2012 11:59 PM #25
Rainmaker
526,069
Mike & Eve Alexander
Buyers Broker of Florida - Orlando, FL
Exclusively Representing ONLY Orlando Home Buyers

Yes, I am sure.  Almost happened to one of my agents but luckily the seller did not disappear and took responsibility after the closing.

That is one reason that I always recommend that the buyer pay for and use a competent title company and not some "fly-by-nite".

Check Carla's comment #9.

Jun 08, 2012 12:15 AM #26
Rainmaker
681,794
Cynthia Larsen
Cotati, CA
Independent Broker In Sonoma County, CA

I understand the desired outcome, but the feds put the onus on the real estate agents and the buyer to make sure the seller complies with their tax withholding requirements. We have been trying to make the escrow company more responsible, since they are the ones who check valid identification and the ONLY ones who can withhold $$$ at closing.

Jun 08, 2012 01:36 AM #27
Rainmaker
3,178,090
Endre Barath, Jr.
Berkshire Hathaway HomeServices - Beverly Hills, CA
Realtor - Los Angeles Home Sales 310.486.1002

Christine, yes it is more and more prevalent

Pamela glad you liked the graphics and yes I add it to the conversation at the listing as well

Phil thank you for adding to the conversation

 

Jun 08, 2012 03:29 AM #28
Rainmaker
3,178,090
Endre Barath, Jr.
Berkshire Hathaway HomeServices - Beverly Hills, CA
Realtor - Los Angeles Home Sales 310.486.1002

Michael, yes that is a potential concern

Eve, thank you for adding to the conversation.

Jun 08, 2012 04:18 AM #29
Rainmaker
3,178,090
Endre Barath, Jr.
Berkshire Hathaway HomeServices - Beverly Hills, CA
Realtor - Los Angeles Home Sales 310.486.1002

Mike what a great comment thank you for adding to the conversation and the clarifications!

Jun 08, 2012 05:50 AM #30
Rainmaker
375,516
Lloyd Binen
Certified Realty Services - Saratoga, CA
Silicon Valley Realtor since 1976; 408-373-4411

Endre, good explanation of FIRPTA.

FIRPTA was passed in the mid-1980s and ignored, even by CAR, until the 1990s.  It's all systematized now and I've included a FIRPTA affidavit in my listing package for 20 years.  But now I don't need the seller's SSN because escrow handles it.

Jun 08, 2012 05:54 AM #31
Rainer
471,564
Kimo Jarrett
WikiWiki Realty - Huntington Beach, CA
Pro Lifestyle Solutions

Good information but how many escrow companies don't comply with the law? It baffles me that any foreign transaction is mishandled by an escrow company, don't you? 

Jun 08, 2012 06:26 AM #32
Rainmaker
1,431,110
Gene Riemenschneider
Home Point Real Estate - Brentwood, CA
Turning Houses into Homes

My experience is like Lloyds above.  Escrow is collecting this. Thanks for the post.

Jun 08, 2012 06:49 AM #33
Rainmaker
3,178,090
Endre Barath, Jr.
Berkshire Hathaway HomeServices - Beverly Hills, CA
Realtor - Los Angeles Home Sales 310.486.1002

Cynthia, you are so right the Federal, State & Local Governments all love to delegate to Real Estate Agents the responsibility to enforce the rules....

Lloyd that is why we need good and reliable Escrow Companies to handle the transactions.

Kimo I am so particular with you handles my Escrows, there are too many weak ones out there....

Gene glad you have a good Escrow Company as well..... I guess that is food for another Blog Post:)

Jun 08, 2012 10:08 AM #34
Rainmaker
3,247,067
Michael Jacobs
Pasadena, CA
Los Angeles Pasadena 818.516.4393

Hi Endre --- very clearly and concisely presented!   Nicely done and certainly gold star worthy - congratulations!

Jun 08, 2012 01:53 PM #35
Rainmaker
3,178,090
Endre Barath, Jr.
Berkshire Hathaway HomeServices - Beverly Hills, CA
Realtor - Los Angeles Home Sales 310.486.1002

Michael thank you, Ironically I thought my previous post would get the coveted Gold Star...go figure:))

Jun 08, 2012 04:36 PM #36
Rainmaker
832,232
Bob Miller
Keller Williams Cornerstone Realty - Ocala, FL
The Ocala Dream Team

Hi Endre, excellent post about a complicated subject many of us do not know enough about in this world economy.

Jun 09, 2012 01:15 AM #37
Rainer
135,632
Matt Robinson
Professional Investors Guild - Pensacola, FL
www.professionalinvestorsguild.com

Endre, very informative article...thanks for sharing!  I was somewhat familiar with FIRPTA, but to be honest, in nearly 11 years I haven't dealt with a foreign national even once.  Well, I had a few look at houses, but none bought...and none have sold.  However, it's still nice to know  in case it ever comes up.

Jun 26, 2013 02:33 AM #38
Rainmaker
3,178,090
Endre Barath, Jr.
Berkshire Hathaway HomeServices - Beverly Hills, CA
Realtor - Los Angeles Home Sales 310.486.1002

Matt glad you enjoyed one of my older post about FIRPTA. I work with a great many Foreign Buyers & Sellers hence this subject comes up often hence my post:)

Jun 26, 2013 09:50 AM #39
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Endre Barath, Jr.

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