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.

This 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

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