FIRPTA - Tax implications of buying property from foreign sellers

Tax & Legal
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I'm in the process of trying to close a purchase transaction for a vacant lot where the seller is not a US citizen, and he does not live in the US (but the property is located here), and in case anyone else ever finds themselves in this situation, especially if trying to do a self-closing or working with a title company that may not be experienced at dealing with foreign sellers, I wanted to share what I've learned about FIRPTA, the Foreign Investment in Real Property Tax Act.

This refers to a particular type of tax withholding from the proceeds that would otherwise go to the foreign Seller, that are required to be done at the time of the transaction closing, with the withheld funds to be sent to the IRS along with Form 8288 within 20 days of the closing. I'm not a lawyer, but based on the various webpages I've read about FIRPTA, including IRS.gov pages and other ones from accounting / tax law firms like this one, the default withholding rate is 15% of the total sale price, and the requirement falls on the "withholding agent" to ensure that these funds are withheld from the Seller and are sent to the IRS. From what I've read on pages like this one, "Every person who controls, holds custody of, receives, disposes of, or pays any item of income to a foreign person that is subject to foreign withholding is a withholding agent." So this could be the title company, or if you're doing a self-closing it would be you, and if the withholding agent fails to comply, they can be held liable by the IRS for paying the 15% amount themselves. This is why I say this could be so critical for anyone doing self-closings, in particular.

There are some very specific exceptions that can make certain foreign sellers exempt from this withholding entirely, none of which would appear to apply to just about any vacant land flipping scenario that I would generally envision (i.e. the most common ones have to do with the property being a primary residence). Aside from that, if the foreign seller believes their actual tax liability associated with the sale should be less than the default amount of 15% of the sale price, they can submit an application to the IRS, asserting their cost basis for the property and requesting a "withholding certificate", which from what I understand would basically be a certification from the IRS that the withholding agent (buyer or their title company) should actually withhold some specific amount less than 15%. I think I read on one of the pages that it can take 90 days to get that certificate from the IRS, after the Seller has submitted their application, and the implication seems to be that this should be done before the closing, not after. I'm not clear, personally, on whether the seller can submit the application after the closing and get any excess withholding refunded that way, or if they might have to submit some type of tax return at that point, instead.

I don't know how often others have or will come across this, but I found this a whole lot more interesting once I realized the liability the buyer could be exposed to, personally, for failure to comply.

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@dl7573

Interesting and yes, you are right, from what I know, not being an attorney. This, by the way, is also an issue that any "non-resident alien" (i.e., any US citizen without a greencard) needs to bear in mind when selling a property in the US, as such a transaction, from what I understand and from what some tax advisors have told me, would fall under FIRPTA as well. A way around FIRPTA would be to operate through a US corporation. This, however, according to the same tax advisor, has to be an actual corporation (not an LLC) or, if it is an LLC, it has to elect c-corp status and may not be a disregarded entity (only then, the company is not considered a "foreign person/corporation" withing the meaning of FIRPTA. Again, I am not an attorney or a tax professional, but this is what I have heard.

1 Like
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@johannes, that makes sense, about setting up a US corporation to hold ownership of the properties if the land flipper, themself, is a non-resident alien. I've worked for, but have never personally owned, a C-corp, so I'm just guessing here, but am thinking that the incremental additional costs and minor headaches (are quarterly meetings/minutes required for C-corp?), relative to owning a single-member LLC, might be better than the alternative of having 15% of every property sale taken from you at the closing table.

Obviously, we should all set aside money for taxes (including making any quarterly payments relating to self-employment income which might be required, etc.), but it just seems to me that having that kind of mandatory withholding throughout the year could have a fairly negative impact on one's cashflow.

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@dl7573

This is great information, thanks so much for sharing.

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Just wanted to update my year-old post on this topic to say that my title company wrote up and submitted the Form 8288 to the IRS without me having to do anything, but they listed my LLC (the one buying the land), not the title company, as the “Withholding agent” on the form.

Then, so far, the non-US-citizen Seller has apparently not submitted a return to the IRS seeking any refund of the 15% withheld amount (which is not surprising to me). However, this has resulted in the IRS sending me/my LLC a letter, indicating that they are not sure what to do with the funds that the title company sent to them.

I spent 2 hrs on the phone this past week trying to sort this out with the IRS (always a good time) but really got no where. I don’t believe that there are any scenarios where either:

  • I/my LLC will be found responsible to pay any additional amount beyond the 15% already withheld and sent to the IRS

  • I/my LLC could be entitled to any refund, whole or partial, of the 15% withholding

So I’m basically going to just ignore the IRS letter at this point. Will let anyone interested know, in this thread, if that blows up in my face in anyway. :blush: