Why Do Aliens Have to Pay Real Estate Taxes on Sales?

Because of the Foreign Investment in Real Property Tax Act.

If you have ever purchased a property from a resident or non-resident alien, on the closing the seller (alien) pays a 10% tax to the IRS. This is called the Foreign Investment in Real Property Tax Act (FIRPTA) and was initiated to stop aliens from investing in real estate in the United States and selling without paying any taxes on the profit on their sales – either to the IRS or to their native government.

This tax does not apply to every property but check with your closing agent as some want to withhold on any sale. Exceptions are-

  1. If the proceeds are less than $300,000 and the property has been the residence of the seller, then no taxes need be withheld.
  2. If the amount of the next proceeds is over $300,000 but less than $1,000,000 the taxes are not withheld on the first $300,000 but are charged on the amount over at the rate of 10%.
  3. If the proceeds are over $1,000,000 then the amount of taxes withheld is 15% and no allocation for exemption even if it is the residence of the seller.

In recent years, the TSA has been monitoring foreign nationals’ sales for the purpose of uncovering money laundering. I would guess that on 10 different closings in the last couple of thousand, the buyer was disqualified from the purchase because of being on the TSA “No Buy List.” Don’t be surprised if this sudden “no close” happens to you and you likely will not know it until the day before the closing. It has been grounds for keeping EMDs in our case but you should think about who the buyer may be and consider at length if keeping his EMD is worth the risk.

Here is where the newest issue is disconcerting for investors or buyers of any type. The current real estate contracts contain language that requires the 10% withholding so your seller has a contractual agreement to pay the IRS. If the alien can prove his native government’s rate is lower, the lower amount will be withheld. But starting February, 16, 2016 a new withholding rate signed in law by President Obama requires a 15% withholding. Buyers will have to add an addendum stipulating the 15% versus the old 10% rate.

change your life mentoring click button j 300x236 1This added addendum is important until the contracting is changed itself because the seller is bound to pay 10% by contract but not the other 5%. However, the closing agent must withhold the extra 5% from the closing proceeds – if the seller’s property doesn’t qualify for an exception. So where is the extra 5% coming from? The seller could make a case that his contract is for 10% only and the buyer pays the rest or he won’t close. He could go on to sue the buyer for breach of contract. Remember, you can be in the right and still get sued.

In summary, I am not trying to scare you but being prepared for this event doesn’t take much effort and your closing agent should have been alerted by his title insurance company. If you have a buyer that gets rejected by the TSA review, don’t do business with him under another name if you know about it. You could be setting yourself for a conspiracy arrest with your buyer telling the Feds you told him how to do it! Be aware of the Foreign Investment in Real Property Tax Act.

To your limitless success,

Dave Dinkel

Real Estate Mentor Program Founder

Visit davedinkel.com for full privacy policy, terms of use, etc.  Be sure to contact us through the website at davedinkel.com if you have questions or concerns ([email protected]).  Results mentioned in this presentation and any video, article, and/or material related to Dave Dinkel and his associated businesses are not typical nor are a guarantee of any earning potential.  No advice is to be construed as legal, accounting, or professional advice EVER.  Please consult related licensed and qualified professionals before taking any action.  No person(s) mentioned in the articles and /or shown on videos received compensation in any form for their opinions.

Why Do Aliens Have to Pay Real Estate Taxes on Sales?

Because of the Foreign Investment in Real Property Tax Act.

If you have ever purchased a property from a resident or non-resident alien, on the closing the seller (alien) pays a 10% tax to the IRS. This is called the Foreign Investment in Real Property Tax Act (FIRPTA) and was initiated to stop aliens from investing in real estate in the United States and selling without paying any taxes on the profit on their sales – either to the IRS or to their native government.

This tax does not apply to every property but check with your closing agent as some want to withhold on any sale. Exceptions are-

  1. If the proceeds are less than $300,000 and the property has been the residence of the seller, then no taxes need be withheld.
  2. If the amount of the next proceeds is over $300,000 but less than $1,000,000 the taxes are not withheld on the first $300,000 but are charged on the amount over at the rate of 10%.
  3. If the proceeds are over $1,000,000 then the amount of taxes withheld is 15% and no allocation for exemption even if it is the residence of the seller.

In recent years, the TSA has been monitoring foreign nationals’ sales for the purpose of uncovering money laundering. I would guess that on 10 different closings in the last couple of thousand, the buyer was disqualified from the purchase because of being on the TSA “No Buy List.” Don’t be surprised if this sudden “no close” happens to you and you likely will not know it until the day before the closing. It has been grounds for keeping EMDs in our case but you should think about who the buyer may be and consider at length if keeping his EMD is worth the risk.

Here is where the newest issue is disconcerting for investors or buyers of any type. The current real estate contracts contain language that requires the 10% withholding so your seller has a contractual agreement to pay the IRS. If the alien can prove his native government’s rate is lower, the lower amount will be withheld. But starting February, 16, 2016 a new withholding rate signed in law by President Obama requires a 15% withholding. Buyers will have to add an addendum stipulating the 15% versus the old 10% rate.

change your life mentoring click button j 300x236 1This added addendum is important until the contracting is changed itself because the seller is bound to pay 10% by contract but not the other 5%. However, the closing agent must withhold the extra 5% from the closing proceeds – if the seller’s property doesn’t qualify for an exception. So where is the extra 5% coming from? The seller could make a case that his contract is for 10% only and the buyer pays the rest or he won’t close. He could go on to sue the buyer for breach of contract. Remember, you can be in the right and still get sued.

In summary, I am not trying to scare you but being prepared for this event doesn’t take much effort and your closing agent should have been alerted by his title insurance company. If you have a buyer that gets rejected by the TSA review, don’t do business with him under another name if you know about it. You could be setting yourself for a conspiracy arrest with your buyer telling the Feds you told him how to do it! Be aware of the Foreign Investment in Real Property Tax Act.

To your limitless success,

Dave Dinkel

Real Estate Mentor Program Founder

Frequently Asked Questions

1. What Should I Do If a Seller Ghosts Me?

If you feel you have been ghosted, act decisively and quickly. If you have tried texting and calling, it’s time to drive by the seller’s location. I always take the recorded Notice of Interest or Memorandum of Contract to leave, so the seller knows it exists. Go by at a time when you know they will be there and don’t be confrontational, just get the facts.

In our experience with new investors, the chances of losing a deal with no contract is likely over 85%. Verbal commitments do not apply in contract law; get everything in writing, especially contract changes.

Different ‘gurus’ have different opinions, but our experience is finding motivated sellers and then a buyer for your deal. Ideally, you should be finding motivated buyers from day one, so you are ready when you find a seller. Buyers are easier to find as you can see at https://davedinkel.com/products/

Prevention only comes about by thinking a Black Hat wholesaler will be coming after your deal. First, educate the seller that an unscrupulous investor may come by and illegally offer more money, have the seller sign your “Notice to Homeowner,” stating that he understands he cannot accept another offer.

There is nothing illegal about changing their mind, it is called seller remorse and occurs about 25% of the time. However, if they have signed your contract, it can’t be cancelled for any reason unless acceptable to the investor/buyer.

If price is an objection, you need to find out how important it is to sell fast and for cash. If the seller isn’t under a time constraint, has a money issue, or has a personal dilemma, he may not agree to the price you need. Offer to help move and build it into your price before you make your offer. However, never give the seller money; only pay the moving company, and only after closing (escrow with a closing agent). If fear is the seller’s issue, break it down into what the real problem is and answer their objections one at a time.

You can get to the root of motivation for a seller by asking a few questions. First, “Why are you selling?”, “How soon can you close?”, and Are you ready to sign an AGREEMENT today, if not, what do I have to do to make you comfortable?’. The answers to these questions will determine the truth about your seller’s motivations.

The best times to involve your attorney in your deals are to have him review your contracting, review the signed contracts from the seller and end buyer, have him open escrow and start the title work, negotiate with city or counties for lien reductions or mortgage payoffs with lenders, and to close the transactions.” Your attorney is not the adversary; it’s the opposing party’s attorney who is a deal killer, and having your attorney allows him to help overcome this obstacle.

The key to successful prospecting and bringing back deals that didn’t close is to follow up until the property is transferred in the public record. Some of our deals have been where the seller came back to us months and years later because they felt comfortable with us and not the other “pushy” investors who contacted them.

Your contract’s most important clauses are inspection period (as long as possible), when the EMD must be deposited if at all, your ability to access the property, any added clauses specific to the property that will protect you against seller claims later that were verbal only.

Visit davedinkel.com for full privacy policy, terms of use, etc.  Be sure to contact us through the website at davedinkel.com if you have questions or concerns ([email protected]).  Results mentioned in this presentation and any video, article, and/or material related to Dave Dinkel and his associated businesses are not typical nor are a guarantee of any earning potential.  No advice is to be construed as legal, accounting, or professional advice EVER.  Please consult related licensed and qualified professionals before taking any action.  No person(s) mentioned in the articles and /or shown on videos received compensation in any form for their opinions.