Anytime a foreign investor sells real estate in America, FIRPTA is triggered and the buyer is required to withhold 10% of the sales price. This issue rarely arose in recent history. But due to the high number of Canadian investors who purchased property in Arizona the last few years, FIRPTA will be on Googles’ list for top search terms the next few years. In fact, with the recent stabilization of home prices, we are already seeing a number of investors opting to sell.
FIRPTA impacts foreign individuals when they sell real estate. Put simply, FIRPTA requires every purchaser of real estate to withhold 10% of the sales price to help ensure the IRS’s collection of the seller’s capital gain tax. So instead of receiving 100% of the sales price at close of escrow, if FIRPTA applies, then the foreign individual only receives 90% of the sales price.
FIRPTA always applies unless the seller qualifies for an exception. Below is a list of the most-common exceptions:
- U.S. Citizens: FIRPTA only applies to foreign investors ; so if the seller is a U.S. citizen (or dual citizen), then FIRPA does not apply;
- Buyers: FIRPTA only concerns sellers – FIRPTA does not apply if the buyer is a foreign individual as long as the seller is a U.S. citizen;
- Primary Home: Even if the seller is a foreign individual, if the seller used the property as his primary residence and the contract price is less than $300,000, then FIRPTA does not apply; and
- IRS Form 8288-B: Investors who timely file the IRS Form 8288-B may qualify to minimize or eliminate the 10% withholding.
Importantly, the seller may qualify to avoid the 10% FIRPTA withholding tax by timely filing the IRS Form 8288-B prior to the close of escrow. With proper tax planning, the IRS Form 8288-B advises the IRS that the 10% withholding is excessive due to any relevant tax deductions concerning the investment property.
Thus, with prudent counsel and tax planning, the seller can either eliminate the 10% withholding altogether or at least reduce it to some amount less than 10%.
It’s no secret that Arizona’s real estate recovery was fueled by investors – many of whom are foreign individuals. As the time comes for these investors to sell their investment properties, 10% of the sales price will be withheld unless the investors plan ahead.
Hopefully, investors will remember to seek counsel before it’s too late.
If you know a foreign individual who is thinking about selling their property, be sure to mention FIRPTA and advise them to seek counsel early. For more information on FIRPTA and other real estate law related topics, please visit our website at davismiles.com, or call our office today at 480-344-4596 to schedule a consultation with Mr. Charles.
Christopher Charles is an experienced real estate lawyer and a former “Broker Hotline Attorney” for the Arizona Association of REALTORS® (the “AAR”). He has an “AV Preeminent” rating by the Martindale-Hubbell Peer Review Ratings system, which connotes the highest possible rating in both legal ability and ethical standards.
He is a Partner with the law firm Davis Miles McGuire Gardner, PLLC where he serves as the chair of the Real Estate Practice Group. Mr. Charles is an Arbitrator and Mediator for the AAR regarding real estate disputes; he serves on the State Bar of Arizona’s Civil Jury Instructions Committee where he helped draft the Agency Instructions and the Residential Landlord/Tenant Eviction Jury Instructions.
Mr. Charles is a licensed real estate instructor and he teaches continuing education classes at the Arizona School of Real Estate and Business. For a list of upcoming speaking engagements, please visit davismiles.com. He can be reached at firstname.lastname@example.org
 The Foreign Investment in Real Property Tax Act of 1980, enacted as Subtitle C of Title XI (the “Revenue Adjustments Act of 1980”) of the Omnibus Reconciliation Act of 1980, Pub. L. No. 96-499, 94 Stat. 2599, 2682 (Dec. 5, 1980).
 FIRPTA also applies to properties owned by an LLC or corporation if the income flows through to a foreign member or shareholder.