What do listing agents need to know about FIRPTA?

QUESTION: A few days ago, I was going over the listing agreement with a new client. When we got to the seller representations section of Form 101, he asked me about paragraph 12(g). That paragraph asks the seller to state whether he or she is a foreign person as defined in the Foreign Investment in Real Property Tax Act (“FIRPTA”). What is that definition? And what are the best practices for listing agents when it comes to discussing the requirements of FIRPTA with potential clients?

ANSWER: When it comes to individuals, FIRPTA defines a “foreign person” as a nonresident alien individual. A nonresident alien individual is someone who is a citizen of another country, and who has not been granted permanent U.S. residence as evidenced by the issuance of a permanent residence card a/k/a a “Green Card.”

What listing agents need to know, and disclose to their seller-clients, is that under FIRPTA settlement agents may be required to withhold a portion of the sales price from the seller at closing if the seller is a “foreign person.” Paragraph 12(g) was added to the listing agreement in July 2023 in an effort to prompt listing agents to have that important discussion

Listing agents should also know that there are a number of exceptions to the general rule. For example, if the seller ends up selling to a buyer who intends to occupy the property as their primary residence and the sales price is $300,000 or less, no withholding will be required. Also, if the seller applies for and obtains something called a FIRPTA Withholding Certificate from the IRS prior to closing, no withholding will be required. If withholding is required, 10% of the purchase price (or 15% if the purchase price exceeds one million dollars) must be withheld and sent to the IRS. The seller would be entitled to a refund of any withheld amount that exceeds their actual tax liability.

Finally, listing agents should know, and discuss with their clients during the listing process, that if they fail to provide to the closing attorney an affidavit certifying that the seller is not a foreign person as defined in FIRPTA, there may be withholding as provided by the Internal Revenue Code.

Release Date: 3/7/2024

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