Because of the many foreign owners of property in south Florida, it is imperative that Realtors know the requirements of the Foreign Investment in Real Property Tax Act (FIRPTA). Internal Revenue Code Section 1445 requires the transferee in the purchase of real property from a nonresident alien to report to the IRS and, unless the transaction is exempt, to withhold and pay over to the IRS an amount equal to 10% of the sales price of the property.
The threshold test is whether the purchasers will occupy the property as their residence and the value of the property is $300,000.00 or less. The property is considered to be occupied by the purchasers as a residence if the purchasers will occupy the property in the year following the sale 50% of the time it is occupied. By way of example, if the property is occupied only six months of the year following the sale, it must be occupied by the purchasers for three of those six months. If the sale is to qualify for this exemption, an affidavit from the purchasers establishing the residence requirements is needed. If this criteria is met,the withholding requirement will not apply.
The purchaser is not the only party involved in the transaction who may have responsibility to withhold. The agents of the seller and the purchaser can also be responsible even though the purchaser has the primary responsibility. The agents who may be responsible include the real estate brokers and lawyers who are involved in the transaction. When a transaction is not exempt, a form 8288 tax return regarding the seller's profit from the sale of the subject property must be filed and the withheld amount must be remitted to the IRS using form 8288-A. It is very important that any Realtor involved in the transaction document the reporting and the remittance. Realtors should insist on receiving copies of the IRS forms for their files.
Realtors should also be aware of the advantage to a foreign seller if the seller files a request with the IRS for a reduced withholding certificate. If the seller has reason to believe that the tax liability is less than the required 10% of the purchase price to be withheld, the seller can file a request for reduced withholding certificate. If the request is filed prior to the closing, the withholding amount may be escrowed with the closing agent pending the receipt from the IRS of a determination as to reduced withholding. The amount required by the IRS when it makes its determination is remitted by the closing agent. The advantage to the seller is that the funds can be held in an interest bearing escrow account pending the IRS determination. If this procedure is not followed, the entire 10% must be remitted to the IRS and the seller must file a tax return to seek a refund of the amount over the seller's actual tax liability.
The FIRPTA Rider is now a part of the FAR/Bar Comprehensive Rider or still exists as a separate rider to be attached to any contract for sale and purchase. The rider specifies the reporting and remittance requirements and also sets forth the escrow procedures to be followed in the event that the seller makes a request for reduced withholding prior to the closing. Realtors should be aware of the contents of the rider and should be using the rider in connection with any sale by a nonresident alien.