What are the three MOST important items to remember regarding the FIRPTA withholding?
- The withholding is held on the Seller who is a FOREIGNER
- The Foreign Seller should have an ITIN (Individual Tax Identification number) when the withholding is done at the closing of the property being sold
- The withholding AMOUNT is 10% of the sale price up to $1,000,000 and 15% for amounts above $1 million
I have a complete article regarding the FIRPTA withholding at this link on our website, but the above 3 items are what every Escrow Officer should automatically focus their attention on when opening a transaction, particularly when there is a Seller with a foreign name.
As I am posting this short article you know that something must have happened that made it into our Just Another (crazy) Day at Viva Escrow annals! Let me go through the 3 items:
- Not all foreign Sellers have a foreign name. For instance, a Canadian Seller probably has a Western name, but Canada IS NOT a part of the U.S., so he could be a foreigner. If he is, we hope that he will advise his Real Estate Professional and it will be pointed out when the transaction is opened. No surprises at the end, please!
- If we know right up front that we have a foreign Seller, then the next question is, “Does he/she/they each have their own individual tax identification number (ITIN)? If not, then we hope that they will apply for one right away. If we have to do a withholding for them, it would be nice to have an ITIN to put on the forms so that the IRS knows who to credit this payment to.
- If we have to do the withholding, we must remember that there are three tiers of withholding:
Tier 1 – if the property sale price is under $300,000 and the buyer signs a Buyer’s Affidavit that he will be living on the property, NO withholding is required
Tier 2 – if the property sale price is $1,000,000 or less, the withholding amount is 10% of the sale price
Tier 3 – if the property sale price is $1,000,001, or more, the withholding amount is 15% of the sale price
So what crazy thing happened?
We received a call from a CPA that his foreigner client sold a property for $700,000. The withholding showing on the closing statement was 15% of the sale price, instead of the 10% as required by law. That means that instead of sending $70,000 to the IRS, the amount sent was $105,000. A difference of $35,000. The question was: What could his client do?
Our (obvious) response was: Have the client file his income tax return at the end of the year and get any excess payment back.
Unfortunately, for reasons that the CPA was not able to provide, his client’s financial situation was such that the client was unwilling to file a tax return with the U.S. government. Was there another way to get the excess payment back? After checking with other CPAs and the attorneys who handle FIRPTA issues the responses were all the same: file that income tax return; there is no other way to get it back.
What is the reason for writing this short article? The CPA said that upon questioning, the Escrow Officer did not know how much to withhold and arbitrarily withheld the higher amount. Seriously? Did that Escrow Officer not realize that he/she just cost the client $35,000? If the EO did not know, shouldn’t he/she have researched it first, or called someone in the escrow association for help? How can the EO be practicing without the proper education? This is not a new law!
Although this is not a problem that Viva Escrow had to contend with, we are given scenarios and asked questions like this all the time, which means I get to write another educational warning article for clients and consumers.
Our slogan is, “You have questions, we have answers!” Unfortunately, sometimes you might not like the answers……
Juliana Tu, CSEO, CEO, CBSS, CEI, SASIP
Good news! “The Art of Escrow” is out! Look for it on www.amazon.com!
The Art of Escrow:
The Fight For Your American Dream and the Pursuit of Homeownership
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- Are You a Foreigner and Need to Know About U.S. FIRPTA Withholding Laws? - February 20, 2019
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