FIRPTA is a United States tax law that imposes income tax on foreign persons disposing of United States real property interests. A U.S. real property interest includes sales of interests in parcels of real property as well as sales of shares in certain U.S. corporations that are considered U.S. real property holding corporations.
Persons purchasing U.S. real property interests from foreign persons, certain purchasers’ agents, and settlement officers are required to withhold 15% (increased from 10% effective February 15th 2016) of the gross sales price from proceeds as a “deposit” due to IRS within 20 days after closing
Withholding ensures U.S. taxation of gains realized on a sale of real property. The transferee/buyer is the withholding agent. If you are the buyer you must inquire if the seller is a foreign person. If the seller is a foreign person and you fail to withhold, you may be held liable for the tax.
A common exception to FIRPTA withholding is that the buyer is not required to withhold tax in a situation in which the buyer purchases real estate for use as his primary home and the purchase price is not more than $300,000. However, buyers should be aware that while they may meet the withholding exemption they are still responsible for the seller’s tax liability, interest and penalties should the seller not file a US income tax return to report the sale and pay any relevant taxes.
Therefore, it is best to always collect 15% for FIRPTA and let the IRS advise how much, if any, is owed. The possiblity exists that they may return a portion of the amount collected.
For additional information go to IRS FIRPTA WITHHOLDING GUIDELINES