Trending
Dear Mr. Feichthaler:
I plan to purchase a home that is owned by a foreign seller. I have read a little about FIRPTA taxes on the seller, and I wasn't sure if I should have concerns. Should I?
-- Nicholas A.
Dear Nicholas:
Great care should be exercised in working with foreign sellers. Although the standard contract does address this issue, it is not done with enough detail to protect buyers. FIRPTA stands for "Foreign Investment in Real Property Tax Act." This is not a separate tax, rather a withholding against potential taxes owned by the seller. Generally, 15% of the sales price must be withheld by the law firm or title company handing the title transaction, and sent to the IRS.
The IRS also offers sellers a mechanism to reduce or eliminate withholding through an application for a withholding certificate. The idea is that the seller shows the IRS that little or no tax will be actually due, so the IRS states that no funds need to be sent. Historically, the title company would hold the funds and send them either to the IRS or seller, within 90 days. Ninety days was the IRS deadline.
However, in the past three years 90 days is but a mere memory. Take your pick of excuses (COVID, lack of funding to IRS, etc.), but the IRS now routinely takes over a year to address these requests. Logically, this should not impact you as the buyer, since you don't owe the tax, right?
Well, the answer is a resounding NO. As buyer, YOU are legally obligated to ensure the timely and correct payment of FIRPTA withholding to the IRS. This is why, at this time, I recommend that buyers require in the contracts that the withheld funds SHALL be sent to the IRS within five days of the closing transaction date, and that all costs of FIRPTA be borne by the seller. It is also very important to confirm the law firm or title agent has a strong background in collecting and remitting FIRPTA funds. If mishandled, you could be responsible for interest, penalties and possibly the entire withholding itself. That amount could easily be $100,000 or more!
As buyer, it is vital you protect yourself. That starts with the contract, and making sure the home is everything you believe it is. By addressing these issues at the outset, you will be much more likely to have a smooth, worry-free transaction with no surprises later. Care should be taken with any real estate purchase, but especially those involving foreign sellers.
Eric P. Feichthaler has lived in Cape Coral for over 35 years and graduated from Mariner High School in Cape Coral. After completing law school at Georgetown University in Washington, D.C., he returned to Southwest Florida to practice law and raise a family. He served as mayor of Cape Coral from 2005-2008, and continues his service to the community through the Cape Coral Caring Center, Cape Coral Museum of History, and Cape Coral Kiwanis. He has been married to his wife, Mary, for over 20 years, and they have four children together. He earned his board certification in Real Estate Law from the Florida Bar. He is AV Preeminent rated by Martindale-Hubbell for professional ethics and legal ability, and is a Supreme Court Certified Circuit Civil Mediator. He can be reached at eric@capecoralattorney.com, or 239-542-4733.
This article is general in nature and not intended as legal advice to anyone. Individuals should seek legal counsel before acting on any matter of legal rights and obligations.