Ep. 59 – What is FIRPTA (Foreign Investment Real Property Tax Act)?

Matthew Maschler:
Welcome to the Real Estate Finder podcast. I’m Matthew Maschler, real Estate broker with Signature Real Estate Finder, and with me the co-host of the Real Estate Finder podcast, Stacy Garcia. Hi, Stacy. How are you? I’m
Staci Garcia:
Alive.
Matthew Maschler:
<Laugh>. No, that’s good to know. That’s good to know. That’s good to know. Stacy, have you ever heard the word FIRPTA?
Staci Garcia:
Yep.
Matthew Maschler:
You know what it means?
Staci Garcia:
Foreign investor property,
Matthew Maschler:
Foreign investor, real property tax act. Yeah. Okay. Yeah. So it, it FIRPTA is, sounds funny. It sounds like a funny word. It sounds like a burp. But it’s important for real estate agents to know. It’s when, and it comes into play when you’re dealing with foreign nationals who are selling their property. And what I try to tell my agents and what all agents should know is when you’re on your listing appointment, if you find out that your seller is a foreign national, you should ask them if they’re aware of their FIRPTA obligations. And most of the time they’ll say yes, and that they have a, an accountant that that, that they deal with that handles it. And that’s okay. And but sometimes they don’t know, or sometimes they know the wrong thing. So I like to tell stories.
Mm-Hmm. <affirmative> you know, I’m at that age, I just turned 50, so I’m at that age. I tell stories about like, when I was a kid, a TV show or a movie or a song, or a lesson I learned from, from, from media or from my career in real estate. And that’s why I started this podcast. So the first time I encountered feta, I was representing a seller in the oaks of Boca Raton. And they were Canadian. So, you know, when you think of foreigners, you don’t always think of Canadians. But to all my real estate agents out there, if you have Canadian sellers, think FIRPTA. So I wasn’t aware of all the Farter rules and and I asked him, you know, if he, you know, I knew enough to ask if he had a, had an accountant to handle the, the sale.
And and he said, yes, but you know, the market, this was during the market crash in like 2010, 11. So the seller lost money on the property, right? They’re selling the property for less than they bought. So there’s no taxes because they lost money. So they didn’t think they were going to have to deal with any of that. We get to the closing and the title company wants to charge the seller a 15% withholding for FIRPTA. So, first thing we have to say is that with, it’s a withholding, it is not a tax. The IRS doesn’t tax sellers 15% of the purchase price, the gross purchase price. The, the, but it’s a withholding on the of the purchase price. So 15% of the total sales price gets withheld by the title company and submitted to the irs.
It’s a, it’s incumbent upon the seller to file a tax return and ask for a refund. So just like at work, you get a salary and your your boss escrow’s money holds money, withholds money. When you do your tax return, you can either owe money to the IRS or get a refund from the irs. And if you’re a real estate agent, nobody’s withholding any money. You get, you get your big ginormous real estate commission checks. But come tax day, you have to pay a very big, large percentage in taxes cuz there was no withholding. The IRS trusts real estate agents, right? Because we’re licensed by the state. We live in the country and the IRS knows that they can go after us for any unpaid taxes. So if I made $400,000 in commissions but, you know, I have expenses, advertising, et cetera of 300,000.
So I made a hundred thousand dollars of income and I owe the IRS on my income. If I don’t pay it, the IRS knows that they can come after me, they can audit me, and they can even imprison me if I don’t pay those taxes. Whereas if the seller is a foreigner, if they’re Canadian or English, or South African or Chinese or Venezuelan and they owe taxes, there’s nothing the IRS can do to go after that person in their home country. If they have, if they have no other contacts with the us, don’t own any other property in the us, never come back to the us the IRS is powerless to collect taxes owed. And that’s why they created this rule that requires, and it’s interesting, do you know who’s required to pay the FIRPTA? The buyer. The buyer, right? Because the IRS knows that if the seller’s gone, they can’t go after the seller.
So it’s a, it’s a buyer’s obligation to make sure that that money is collected at the closing. And if it’s not, the buyer is liable. Cause the IRS knows it’s much easier to go after the buyer who owns real property here and who’s more likely to be a citizen or a resident here. So that’s why, you know, the title company won’t mess around and, and, and just let the seller say, Hey, I don’t know. I don’t, it’s okay cause I don’t owe any taxes. I bought the house for a million. I sold, I sold it for 800,000. I lost 200,000. There’s not gonna be any taxes due. Even if you withhold 50% of a million $150,000, I’m just gonna get it back anyway when I do my tax return. So you don’t have to withhold it. No, you have to withhold it, and the closing agent will catch it, and it’s on the incumbent on the buyer to make sure that that is paid.
So it it will get collected. There are exceptions to the rule. If it’s if it’s under 300,000 and the buyer intends to live in the property then they don’t, the, the fr withholdings don’t have to be collected, but the buyer has to sign in writing that they’re gonna live there. And most of the time, there’s no requirement in the contract that the buyer participates. So if you’re gonna employ that exception, you gotta make sure you do that when you get your contract signed, because otherwise the buyer may not sign it out of the goodness of their heart at the closing table.
Staci Garcia:
What if a, a foreign national buys a property here that was owned by a foreign national?
Matthew Maschler:
Well, it’s once the buyer has the property, the IRS has jurisdiction on the property, they can file a lien on the property. Right. If it wasn’t collected, the iris can file a lien. And now when that, when that seller sells it, they’re gonna sell it the gross price, right? If it’s subject to FIRPTA, the gross purchase price, 50% will be withheld by the title company. It might be less. If it’s under a million dollars’, we’re gonna call Greg Geffen later to find out when it’s less than 15%. Okay. But but, but yeah. So then, so when the, when that second, when that buyer becomes the seller 15% will be withheld under FIRPTA. And if there is an IRS tax lie, that will be against the property, and that presumably means there won’t be enough money to pay and they won’t be able to close.
So so the takeaway for, for real estate agents that are listening to this is when you’re on your listing appointment, the seller if they’re foreign, make sure they know about FIRPTA rules. And if not, put them in touch with an accountant. I have a few accountants to that I can recommend or, or their, or the closing attorney. And make sure you do it early in the process. One, because you don’t want the seller to be surprised later. And two sometimes to get exemptions or certifications the, it could take time. So you don’t wanna wait until you get an offer, or god forbid, waits until the closing to first start. You want to start the day you get that listing agreement signed, or the day it’s listed get your ducks in a row on the FIRPTA.
Staci Garcia:
Is it a law that they have to write on the listing that the owner is a foreign national?
Matthew Maschler:
No.
Staci Garcia:
Oh,
Matthew Maschler:
No. And there’s, and, and there’s something in the contract that there’s standard language in the contract that says if, if the seller is a foreign national, they will be subject to Ferb tax Uhhuh. So it, it is buried in the, in the contract, but it’s also the law. So it, you know, sellers, it’s very difficult to get around this. So I’m going to call Greg Greg, and we were talking late last night about the FIRPTA. And he, he wanted to be on the sh on the show, but he had a he had a closing this morning, so we’re gonna call him in his office.
Speaker 3:
Your call has been forwarded to an
Matthew Maschler:
Automatic, all right, I’m going to text him to tell him to call in. And in the meantime, I’m gonna tell you a story of why this came up. Okay? so went on a listing appointment on a nice house in Seven Bridges, and the seller is in a different country. It’s an incredible story. They were, they were here visiting friends. They come to Boca every year, and they visit with friends. And they, their friends bought a house in Seven Bridges. So they friends wanted to show it to them. So they went to the sales center, and they looked at all the houses and, and looked at all the models. And these people decided to go ahead and buy a house. But they live overseas. They don’t, they don’t live here. They only come for vacation. But when you’re in those models, it’s so it’s very intoxicating.
It’s very intoxicating. So they, they bought a house and realize that they have buyers regret, I think, after the closing, right? That they’re not gonna spend as many days here as, as they think they will. So so they they rented it out mm-hmm. <Affirmative>, and now they’re thinking of selling. So I’m on the listing appointment, and I, and I say, okay, well, you realize that as a, as a foreign seller, you’re gonna be subject to this 15% withholding. And they said, oh, no, we don’t. I said, what do you mean? No, we don’t have to pay taxes in the us. I’m like, yes, you do. Everyone has to pay taxes. They’re like, no, because of the way the bank was set up and then all the money goes to this offshore bank, nothing touches the us. And I’m like, well, the properties in the us right?
Okay, Gordon Geck go the properties in the us right? I asked do you do you pay your, the property taxes? They said, yeah, yeah, we pay our property taxes. I go out of the farm bank, Uhhuh, okay? You pay all the bills, hoa everything outta the farm bank. Uhhuh. Uhhuh, okay. But what about, you said, you said you had it rented. What about the what about the tenant’s deposit That’s in the farm bank too. So I don’t wanna go there and say that it is tenant’s deposit has to be in a Florida bank. Yikes. Right? But I said, listen, you’re, you’re going to have to deal with this. There’s, at the closing, there’s going to be a a 15% withholding of the total purchase price. So if you sell the, the property for $2 million, right? They’re going to hold $30,000 until you file a tax return.
Oh, we can file a tax return. We don’t have a tax ID number. I’m like, well, you’ll get one when you go to file the tax return. So the listing didn’t go very well, point didn’t go very well, then I’ll go, are you sure? I’m like, yeah, I’m sure. I mean, I wouldn’t be blowing, blowing my listing appointment, right? Right. If I wasn’t sure, right? I mean, I can’t not tell you. And then you find out later that that, that, that you, at the, at the closing, that $30,000 is gonna go to the it’s 15% of, no, it’s not 33, 300,000, right? Why is it 30 300,000, 15% of a million of 2 million? It’s $300,000. So I can’t, you know, you can’t I can’t sit back and have you not know that $300,000 at the closing is going to be held. There’s nothing you can do about it, right?
It will be withheld and then, but it’s not a tax. You can, you can get a you file a tax return and you can get that refunded. Because theoretically, I dunno, if you paid one five for the house and sold it for 2 million, you had a $500,000 gain minus whatever expenses, maybe you only have a $300,000 gain, 20% of 300 thousands, 60 grand. You may only owe 60 grand in taxes. You file that tax return and get the rest back, you get the two 40 back. So so you know, it, it makes, it, it’s to your benefit to hire an accountant and do the tax return. It’s not gonna cost you a lot of money, but you have $240,000 at stake. So so I didn’t get the listing. And we’ll see what happens next. But it, it reminded me that I wanted to tell these two stories, the old story and the news story, and tell my agents out there that if you if you have a foreign seller that 10 to 15% of the gross sales proceeds, most of the time, 15% will be sent to the IRS within 20 days of closing.
And it’s the buyer’s responsibility. There’s exemptions if the property’s less than 300,000, and if the buyer’s gonna live there, but the buyer’s gonna have to cooperate with you on that. So you have to
Staci Garcia:
Make sure, so I have a Canadian, I have Canadians coming down mm-hmm. <Affirmative> December 4th to buy a property on the beach. Is there something that you have to tell your foreign national buyer?
Matthew Maschler:
You should let them know these rules. Listen, just so you know, these are the rules when it comes time to sell, right? These are the, these are the rules regarding taxes that you’re gonna have, they’re gonna withhold a percentage of, of the, of the sales price for you to ultimately pay your taxes when you sell. And like my original customer who, you know, sold, bought house for a million and sold it for 800,000, lost 200,000. It doesn’t matter if you made or lost money because you’re at the closing table. Nobody knows the title company doesn’t know. The federal government doesn’t know irs. No one knows what, if you have a gain or loss, all they know is you have a sale, right? When you file the tax return, that will show the gain or loss, and then you’ll get your money back.
And just because a foreign national has a tax ID or social security number, it doesn’t mean that they’re exempt from FIRPTA. A lot of foreign nationals will have a tax ID number because, you know, if they’re renting out the property, they’re reporting that income, hopefully. And other reasons why they may want to have a taxpayer ID number. You don’t have to be a US citizen to have a taxpayer ID number. It’s not a social security number, right? It doesn’t give you citizenship. Just having a taxpayer ID number. You know, our taxes in the US are different than taxes in the rest of the world. I don’t know how it is in the rest of the world, but sometimes they tax your, tax you on your assets. You know, but it’s, you know, so if this foreign national that I was dealing with has a different concept, a different taxation concept than I do you know, okay, but I can only go by the rules that the, the rules that we have. I’m gonna try Greg again. The number
Speaker 3:
Your call had been forward.
Matthew Maschler:
All right? So yeah, he was going to come in and gimme a little bit more technical expertise on, on the ferter rules, on some of the exemptions or exceptions, right? Because, you know, technically it’s a, it’s a 15%.
Staci Garcia:
Who holds that money?
Matthew Maschler:
It’s given to the irs. So the IRS holds it. Oh, mm-hmm. <Affirmative>, that’s a good question. The, the closing agent has 20 days to give it to, to give the money to the irs. I am going to. So, so yesterday on Facebook I put I put what’s it called? A, a note that said, Hey, I’m gonna talk about FIRPTA tomorrow. Does anybody want to be on my podcast? And Greg responded. He, he sent me his YouTube. He did a great YouTube on FIRPTA. So if anyone’s out there and wants to hear more about it check out on, on on YouTube. It’s called FIRPTA, what you Need to Know by the Geen Weber Log Group. It’s pretty good. Alright, so besides Feta, what else do we have to talk about?
Staci Garcia:
Mm. <laugh> I’m, I’m so fried right now that
Matthew Maschler:
<Laugh> since she’s been working, she’s
Staci Garcia:
Juggling. I’m thinking, if you’re not into real estate and you don’t wanna be a real estate agent, what else is going on? Like, what, what other opportunity can you work from
Matthew Maschler:
Home? <Laugh>? What else is going on in the world?
Staci Garcia:
You can make your own hours. Yeah. Uhhuh.
Matthew Maschler:
You can sell soaps and candles on
Staci Garcia:
Et I can, you know why? Because when I go into green wise mm-hmm. <Affirmative>, and I go past that handmade soap section, I want a hurl.
Matthew Maschler:
Yeah. I don’t care. I don’t talk them in soap. I want factory made soap.
Staci Garcia:
I don’t want to smells soap at all. So I have to avoid the section of the supermarket
Matthew Maschler:
<Laugh>. So yeah. So what else? I, I, you know, sometimes I come in with notes mm-hmm. <Affirmative>, but the only notes I came in today with one of the fer to notes. Oh. So okay. So should we end the episode? We could end the episode or we can add on with Greg later. Okay. All right. Well, thanks for joining us on the Real Estate Finder podcast. And actually what I am gonna do is I’m gonna end the episode with the YouTube video for FIRPTA, what you need to know. I’m gonna fast forward a little bit. Okay. I’m gonna play
Speaker 4:
First the basics. What is FIRPTA? Simply stated, for many transactions involving a foreign seller, the Internal Revenue Code requires that 10 to 15% of the gross sales proceeds must be remitted to the IRS within 20 days of the Hi there, I’m Gregory Gaffen, and I am Benjamin. We, and we are gaff funded today. Well, this is very only to realize that the property’s not the right fit for them, or that it didn’t appraise or perhaps the seller with a 20 days of the close. There you go. So the first thing to understand is that FIRPTA is not a tax, it is merely a withholding. In this case, uncle Sam has decided they are not in the business of chasing foreign nationals around the globe to collect the tax on any gains made on the sale of real property. Foreign seller will need to obtain a US tax ID number and apply for a refund by filing a return on the gain or loss on the property.
Keep in mind that the ascertain of the seller’s foreign status and submission of the withholding is technically the buyer’s responsibility and penalties for failure are often assessed against the buyer. As such, this task is sourced to us as the closing agent. What we’ll do in these instances is connect your client with a local CPA who specializes in working with foreign nationals to guide them through the process of filing the paperwork and getting a refund. Here are a few misconceptions that people have. We are often asked after closing costs and commissions, my client is selling the property for less than what he paid for it, a loss. Do we still need to comply with? The answer is yes. Remember, FIRPTA is not a tax, it is a withholding requirement. The fact that it may be obvious your client is taking a defacto loss on the property does not obviate withholding.
Even if this means your client has to come up with a cash at the table to cover the shortage in the case where they’re underwater because of a mortgage, the next misunderstanding we’ll often have is somebody will say, my client’s a non-US citizen, but he or she may already have a US tax ID or Social Security number. Does this mean that we don’t have to deal with FIRPTA? No, not necessarily. Many foreign sellers may already have a tax ID number for a myriad of reasons, but that alone doesn’t mean that we’re free to ignore FIRPTA. They’re only exempt from withholding if they meet what is considered to be a US taxpayer as defined by the Internal Revenue Code, and meet what is known as the substantial presence test, and can execute what’s commonly referred to as seller’s non foreign certificate of closing. This is something to go over and be determined by local CPA with expertise in this area.
Otherwise, and unless the transaction itself is exempt, which we’ll get to in a minute, withholding is required. Now, let’s talk about the exemptions. The cases where the seller is a foreign national, but the transaction is exempt from withhold. This is the area that causes the most confusion transactions where the gross sales price is less than $300,000. Most people in real estate are aware that many transactions that are less than $300,000 are exempt from Brooklyn. But please understand a couple of things. First, the exemption is not automatic. A few criteria must be met. The IRS rules mandate for the transaction to be exempt. The buyer must be purchased in the property as a home for their personal use, and have definite plans to reside at the property for at least 50% of the number of days that property is used during each of the first two 12 month periods following the date of transfer.
That last part, 50% of the number of days used is often confusing to buyers who often see the terms use and 50%, and conflate this with the requirements of establishing residency in Florida and think that we’re talking about 181 days. That’s not the case, as the IRS specifically advises that we do not count the number of days that the property will be vacant. So basically that means that so long as the property is not investment property for rental or a flip, and the buyer’s gonna use it for their personal use, it doesn’t matter if it’s a second home or they’re only gonna use a few months a year, or even a few weeks a year. So the way this works is, in order to recognize this exemption, we as a title company would need to obtain what’s called a residency certificate, where the buyer attest that the holding is exempt as they have the intention to occupy the property within the parameters we just discussed.
Now, here’s where this gets tricky, and this is very important in that there’s nothing in the contract that requires the buyer to sign the certificate form. If the buyer’s not comfortable or unsure, they can’t be forced to sign the exemption form once you’re in contract. And this has been dealt with in advance. So if you’re a foreign seller or if you have a foreign seller for a property that may qualify for the exemption, and obtaining this exemption is important to them. This must be dealt with at the contractual level by adding language to the contract when the parties stipulate that the buyer is buying the property for their use and agrees to execute the required certifications. As always, feel free to touch base with us, but we can provide this language to you.
Speaker 5:
So with a little proactivity on the front end and the right advice, foreign sellers should not have to fear this feta withholding or be taken surprise at the closing table.
Speaker 6:
As always, please feel free to call us with any questions or to assist your
Speaker 5:
Clients. I’m Gregory Geffen. And I’m Benjamin Weber. And this has been what you need to know. We sure hope you.
Matthew Maschler:
All right. So thank you Ben and Greg. They have a great YouTube series called What You Need to Know. Listening to Audio only the, I find the music to be distracting, but on my computer, when I was just watching it on YouTube, it seemed to be fine. So hopefully we didn’t lose our entire audience. But we’re gonna have Greg back on the show in a couple of weeks. And we can talk about FIRPTA. And I won’t say, I’m gonna read to you what’s in the contract on FIRPTA seller shall inform buyer in writing if seller is a farm person, buyer and seller shall comply with FIRPTA, which may require seller to provide additional cash at closing if seller is not a farm person. So it can provide buyer out or closing or prior to closing a certification of non foreign status.
So that’s an exception to FIRPTA. So there, there are certain foreign nationals that they do enough operations here in the US that the IRS has jurisdiction over them. So they’re, they’re accepted from FIRPTA so they can have the certification of non far status, and that gives the buyer the out that they don’t have to collect the FIRPTA withholding. And then it says buyer and seller advice. It’s legal counsel and tax advice regarding their respective rights obligations, reporting and withholding requirements. So we actually, we did have one situation like this in in St. Andrews where our, it was our buyer and the seller was a foreign national with one of these certificates. So our buyer, you know, kind of freaked out, but we put ’em in touch with a lawyer who reviewed the certificate and saw that the, the seller was exempt from the withholding requirement.
And, and we were able to to go ahead with the closing without that without that withholding Awesome, awesome <laugh>, right? You know, what happened, what we both earned 50 turned 50 Sunday. Yeah. And I’m already 50, so now we’re on Flatlining, flatlining, <laugh>. And I don’t, I just, I don’t have the, I usually have a piece of paper with a bunch of of podcast topics. Yeah. And I only brought it cause I brought the FIRPTA, so. All right. Well, thank you for joining us on the Real Estate Finder podcast. I’m Matthew Masher, real estate finder looking to help anyone. Usually it’s New Yorkers and people from New Jersey who are buying property, but if you are buying a property, if you are foreign national buying property, you know, I think it, you know, you know, the, the trick is there’s so, there’s so much stuff here that like this, this seller, you know, said to me, he’s like, well, why didn’t they tell me when I bought the property about this? And I was like, well, who’s they? And there’s no, they that would tell you, like, there’s, there’s a lot of things you have to know. Like the salesman who sold you the, the house, he wouldn’t, he wasn’t thinking of your tax consequences. No one’s advised of their tax consequences when they buy a house.
Staci Garcia:
You think that that would be the first thing. If he already set up an offshore account and he already knows that he doesn’t have to pay taxes, then I think he probably already researched on his own and decided to choose and pick what he felt like paying attention
Matthew Maschler:
To. Maybe, maybe. But also they had, you know, was their foreign advisors that were advising them. Not, not US advisors, but the salesman here isn’t gonna tell you your tax consequences. The closing agent’s not gonna tell you, you know, Hey, remember when you sell, it doesn’t happen. So, so to all my agents or to any agents out there, just a reminder, when you go on your listing appointment, if the seller is not a US person make sure they know the FIRPTA requirements. Contact Greg or contact me. Come listen to my podcast and and get the properties sold. Thanks for joining us on the Real Estate Finder podcast. I’m Matthew Ashler.
Speaker 7:
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Speaker 8:
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Speaker 7:
You know what it’s, you know what time It’s, you know, time’s mania. The time it you time’s, you know who’s time its, you know what time Its Matthew Mania. The time it says, yeah. Got him. Show scared. Can’t look. We’re not afraid of a big bad wolf.