What rules apply to a buyer who is purchasing property in Texas from a foreign seller?
The Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) requires buyers in certain transactions involving foreign sellers to withhold up to 15% of the amount realized by the foreign seller for federal taxes. The amount realized is usually the sales price. Particularly:
- If a property’s sales price is $300,000 or less and the buyer or a member of the buyer’s family has definite plans to reside at the property for at least half the year for each of the two years following the closing, nothing needs to be withheld and no reporting is required.
- If the property's sales price is between $300,001 and $1,000,000 and the buyer or a member of the buyer’s family has definite plans to reside at the property for at least half the year for each of the two years following the closing, 10% of the sales price must generally be withheld and reporting is required.
- If neither situation applies, 15% must generally be withheld and reporting is required.
The buyer must use IRS Form 8288 and IRS Form 8288-A to report and pay the tax.
Wow, so how does a buyer’s agent determine that a seller is a “foreigner” ? Is the money held in escrow? At the title company?
Hopefully the seller’s agent is aware that the client is a foreign seller/owner. The money would be withheld from the seller at closing and paid directly to the IRS, I believe.
Read Income Tax; Shattering The Myths by Dave Champion to see who’s duty it might be to report to the IRS!
If a buyer has no knowledge of the seller’s status as a foreigner, what is the penalty to the buyer? Why is it the buyer’s responsibility to be the collection agent for the IRS?
Good question. However, I do know the penalty to the buyer. I had this happen on a closing last December. Seller was a foreign LLC. We found out this is a Federal law and even though it doesn’t seem logical, if the seller doesn’t pay the tax, then the IRS will come after the BUYER for it. Most definitely I would never advise my buyers not to comply. Doug Allen is correct, the buyer pays the withholding to the IRS and the seller settles up with the IRS when they file their taxes.
Livingston:
I think Doug Allen said the Seller should have the money withheld at closing and paid directly to the IRS :
Doug: Hopefully the seller’s agent is aware that the client is a foreign seller/owner. The money would be withheld from the seller at closing and paid directly to the IRS, I believe.
Livingston: the buyer should pay withholding to IRS and have the seller settle up with IRS when they file?
I lierally about to put a condo on the market that is owned by an Italian…which is it? Guess I can close with a fee attorney to be sure?
My foreign sellers completed an IRS Substitute Form 1099-S at their closings, which was filed by the escrow officers. I don’t know why a buyer would need to report anything if the seller is responsible for the taxes.
I wouldn’t risk giving tax advice to my buyers. See reply to Tom Kile’s post, above.
Realtors have to be gov’t agents? That figures blame the guy at the bottom. What ever happened to escrow getting seller to fill out a form under penalty of perjury.
To many people eating Nutso these days.
I did a transaction like this before. Title took care of providing forms and the withholding. I’m pretty sure Title sent the money and forms to the IRS. Can’t remember for sure.
Keep up the great work! Thank you so much for sharing a great posts.
Thanks a ton Texas Realtors teams for sharing some of the great insights about investing in a property. This article will be of great help to me as soon I am planning to buy a home in Texas. Keep up the good work!!
A foreign buyer is exempted from some taxes to promote foreign investment. This is the reason the process can be tricky so you need to get help from an expert for it.