This article was originally published in Real Estate Agent Magazine Twin Cities, written by Charity Malmberg, Founder and President of Trademark Title
As of last August, Minnesota REALTOR® documents were amended to include a section on the Foreign Investment in Real Property Tax Act (FIRPTA). As a REALTOR®, if you’ve represented a buyer or seller in the last year, then you’d be able to recognize the new section on FIRPTA in the listing agreement, seller’s disclosures and purchase agreement. Do you understand the ramifications and implications the tax code has for buyers specifically?
The Basics of FIRPTA
First off, what is FIRPTA? According to IRS, “FIRPTA authorized the United States to tax foreign persons on dispositions of U.S. real property interests.” Put simply, this tax ensures that the IRS is receiving their capital gains taxes even from foreign investors, who may find it easier to sell a property from abroad without having to give a percentage of their gains back to the government. The law doesn’t stop there. In fact, FIRTPA requires that the buyer, or transferee – even if they are a U.S. citizen – state if their seller (transferor) is not a citizen. If the transferor is not a citizen, then the buyer is required to withhold 10 percent of the amount realized on the disposition. For dispositions of property made after Feb. 17, 2016, the withholding rate increases to 15 percent for properties that sell for more than $1 million. This does not mean the buyer is being taxed. However, if a buyer fails to withhold, they may be held liable for the tax. Of course, exemptions apply to both buyer and seller and the truest understanding of this tax law will always be case-by-case.
What This Means For You
When the housing market “crashed” back in 2008-2009, many foreign investors came in and purchased property in the Twin Cities market – oft en paying cash. Fast forward to today. The market is hot; homes are going fast and these same buyers are now selling, looking to cash in on their investments. It’s important that you’re aware of these transactions and understand your responsibility to help both parties disclose this important information. Helping your buyers and sellers understand FIRPTA is just another way you’re offering them professionalism and peace of mind in this important process.
At this point, you’re probably wondering why FIRTPA is such a big deal. Take a look at this recent transaction.
The buyer had written an offer on a property and the seller accepted; it seemed all parties were set for closing. At time of closing, it was uncovered that the sellers were not U.S. citizens. When this happens there are a few “exemption” questions the seller must answer. If they don’t qualify under these exemptions and the buyer is not planning on using the property as their primary residence, then under the tax code, the buyer is responsible for withholding a certain percentage of the proceeds and submitting it to the IRS. Additionally, after a full investigation of the file, it became clear that the seller disclosures and listing agreement were signed off by the seller as if they were U.S. citizens and thus the purchase agreement was also incorrect. In this case, the transaction was canceled because this was not going to be the buyer’s primary residence and they did not want to accept the tax responsibility.
The Foreign Seller Checklist
As a listing agent, if you are faced with a listing where the property owners are not U.S. citizens, then following this quick and easy guideline will help all parties involved understand how FIRPTA could affect them.
1. Direct all parties to seek outside advice – legal and/or tax.
2. Disclose in the MLS which parties are and are not U.S. citizens and ensure that when the offer comes over it accurately discloses the FIRPTA status.
3. Educate yourself on the tax act and be aware of exemptions and specifics (such as if the buyer will not be occupying the property as their primary residence).
4. Disclose the information to your title company as soon as you obtain an accepted offer.
Again, your goal is always to protect yourself and your clients. So when it comes to new laws and tax regulations, be sure you seek your brokerage’s help and guidance. For more information on FIRPTA and the withholding exemptions, visit the IRS website.