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The Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) may be foreign territory to a lot of REALTORS®, but it’s a federal statute that can have a big impact on real-estate transactions. According to the Internal Revenue Service: the disposition (sale or exchange, liquidation, redemption, gift, transfer, etc.) of a U.S. real property interest by a foreign person (the transferor) is subject to FIRPTA income-tax withholding, because FIRPTA authorized the United States to tax foreign persons on dispositions of U.S. real property interests. This week we take a quick look at FIRPTA and how it could apply in Tennessee.
Q: What is FIRPTA?
A: The Foreign Investment in Real Property Tax Act is a federal statute which was passed to deal with taxes on the sale of real property. It is a way of ensuring that the federal government is paid the taxes due on the sale of real estate, especially when the seller is someone who is not a U.S. citizen or a U.S. company. Typically, if the statute applies, taxes will have to be withheld by the closing company in order to pay the federal government. For more specifics, visit THIS LINK.
Q: Why is FIRPTA language included in Tennessee REALTORS® forms?
A: This language is included to put sellers on notice that FIRPTA may apply to them. There are exceptions to the act, so the seller should consult with their own attorney and/or financial advisor to determine whether FIRPTA will apply to them and how to proceed before closing.
Q: If I have questions regarding documents needed for transactions where FIRPTA applies, who should I speak to?
A: Questions should be directed to the closing attorney after the seller speaks with their own attorney and/or tax professional. The closing attorney should be in a position to determine who should be notified, and when, regarding FIRPTA.