When the seller of commercial property is a foreign person, federal law can require the buyer to withhold a share of the price and send it to the Internal Revenue Service. Let me explain how FIRPTA works and why the settlement agent is central to getting it right.
Written by Adam L. Engel, Esq., Principal and real estate attorney at Prime Title & Escrow
FIRPTA, the Foreign Investment in Real Property Tax Act, is a federal withholding rule that catches many commercial buyers by surprise. When a foreign person sells a United States real property interest, the buyer is generally responsible for withholding part of the sale proceeds and remitting them to the Internal Revenue Service. The buyer, not the seller, carries that legal duty, so it is something I plan for as part of the closing.
This is one more reason the parties to a commercial deal lean on the settlement agent, alongside the title and escrow work I describe in my guide to commercial earnest money and escrow.
Under Section 1445 of the Internal Revenue Code, when a foreign person sells US real estate the buyer must generally withhold 15 percent of the amount realized and remit it to the Internal Revenue Service, according to the IRS. The buyer is the withholding agent and can be personally liable if it fails to withhold. A non foreign affidavit from a US seller avoids it, and a withholding certificate can reduce it. The settlement agent handles the mechanics.
What FIRPTA requires
Under Section 1445 of the Internal Revenue Code, the buyer of a United States real property interest from a foreign person must deduct and withhold a tax equal to 15 percent of the amount realized on the sale, according to the Internal Revenue Service. The amount realized is essentially the sale price, including cash, the value of other property, and any debt the buyer assumes. The buyer is treated as the withholding agent, and if the buyer fails to withhold when it should have, the buyer can be held personally liable for the tax. That is why this is the buyer’s concern, not just the seller’s.
Determining whether the seller is foreign
FIRPTA only applies when the seller is a foreign person, so the first step is establishing the seller’s status. The standard tool is a certification of non foreign status, often called a non foreign affidavit, in which a United States seller states under penalty of perjury that they are not a foreign person and provides a taxpayer identification number. When a US seller properly provides this affidavit, the buyer generally does not have to withhold. Where the seller is in fact a foreign person, or will not provide the affidavit, the withholding obligation stands.
FIRPTA is a buyer obligation, but in practice the closing agent handles the mechanics. I collect the seller’s affidavit where it applies, hold back the required amount from the seller’s proceeds when withholding is due, and coordinate remitting it to the Internal Revenue Service with the proper forms. Handling it at the table is far cleaner than sorting it out afterward.
Reduced withholding and the residence exceptions
The rules include some exceptions and reductions. There are reduced rates and exemptions tied to a buyer purchasing a property to use as a residence under certain price thresholds, but those are generally aimed at homes and do not usually apply to commercial property. The most relevant relief on a commercial deal is a withholding certificate. A foreign seller can apply to the Internal Revenue Service, on the form the agency provides, for a certificate that reduces or eliminates withholding when the actual tax on the sale will be less than the amount that would otherwise be withheld. The application has to be made on time, so this is planned early in the deal, not at the last minute.
Remitting the withholding
When withholding is required, the funds do not stay with the buyer. They are reported and paid to the Internal Revenue Service using the agency’s withholding forms, generally within 20 days after the closing. The seller receives credit for the amount withheld against its actual United States tax liability, and files a return to reconcile and claim any refund if too much was withheld. The withholding is a collection mechanism, not the final tax. As the settlement agent I make sure the right amount is held back and remitted on time so neither side is exposed.
FIRPTA and a 1031 exchange
FIRPTA and a like kind exchange can intersect. A foreign seller doing a Section 1031 exchange may be able to defer the tax, but to avoid the withholding the seller generally has to apply for a withholding certificate following the Internal Revenue Service procedures and meet the requirements on time. I coordinate with the qualified intermediary and the seller’s tax advisor so the exchange and the FIRPTA rules are handled together. I explain how exchanges work in my guide to the 1031 exchange in Virginia.
Foreign investment in Virginia commercial property
Foreign investment shows up across Virginia commercial real estate, and it is especially common in Northern Virginia and around the port and industrial markets of Hampton Roads. Whenever a commercial seller may be a foreign person, I raise FIRPTA early so the withholding, the affidavits, and any certificate application are handled in time. It is also worth remembering that the buyer’s obligation is the same whether the property sits in Virginia or West Virginia, because FIRPTA is a federal rule. For the related reporting on a sale, see my article on Form 1099-S and capital gains.
Tell me about your deal and I will handle the FIRPTA affidavits, the withholding, and the remittance so you are not left personally exposed.
Get Your Free Quoteor call (703) 552-4155Frequently asked questions
What is FIRPTA?
FIRPTA, the Foreign Investment in Real Property Tax Act, is a federal rule under Section 1445 of the Internal Revenue Code. When a foreign person sells US real estate, the buyer must generally withhold a portion of the sale proceeds and remit it to the Internal Revenue Service as a collection mechanism for the seller’s tax.
How much must be withheld?
Generally 15 percent of the amount realized on the sale, which is essentially the price including cash, other property, and assumed debt, according to the Internal Revenue Service. A withholding certificate can reduce that amount when the seller’s actual tax will be lower.
Who is responsible for the withholding?
The buyer, as the withholding agent. If the buyer fails to withhold when required, the buyer can be held personally liable for the tax. In practice the settlement agent handles the mechanics, but the legal obligation rests with the buyer, which is why it is planned into the closing.
How do I avoid withholding if the seller is a US person?
A United States seller can provide a certification of non foreign status, often called a non foreign affidavit, stating under penalty of perjury that they are not a foreign person and providing a taxpayer identification number. When that affidavit is properly given, the buyer generally does not have to withhold.
Can the withholding be reduced?
Yes. A foreign seller can apply to the Internal Revenue Service for a withholding certificate that reduces or eliminates the withholding when the actual tax on the sale will be less than the standard amount. The application must be made on time, so it is handled early in the transaction rather than at closing.
Does FIRPTA apply to a 1031 exchange?
It can intersect with one. A foreign seller doing a like kind exchange may defer the tax, but to avoid the withholding the seller generally must apply for a withholding certificate under the Internal Revenue Service procedures and meet the requirements on time. The exchange and the FIRPTA rules need to be coordinated together.
This article is general information about commercial real estate closings in Virginia and West Virginia. It is not legal advice for your specific transaction, and your costs and requirements depend on your deal. Please confirm the details with me directly.