The Seller Is Foreign. The Contract Says Nothing About FIRPTA. Who Catches It?
The listing is taken. An offer is accepted. The transaction starts moving toward closing.
The seller is a foreign person.
But nobody has raised FIRPTA.
The contract doesn't flag it. The buyer may never have heard of it. The Realtor assumes the closing professional will handle it. And the closing professional may not see the file until valuable planning time has already been lost.
So who was supposed to catch it?
First, a Quick FIRPTA Refresher
The Foreign Investment in Real Property Tax Act (FIRPTA) is a federal tax law that generally requires a buyer acquiring a U.S. real property interest from a foreign person to withhold a portion of the amount realized and remit it to the IRS, unless an exception or other applicable withholding treatment applies.
The withholding is intended to help secure payment of the foreign seller's potential U.S. tax liability arising from the disposition.
Learn more: What Is FIRPTA?
The Contract May Not Catch It
FIRPTA is federal law. Whether it applies does not depend upon whether the purchase contract happens to mention it.
Yet FIRPTA is not prominently flagged in many real estate contracts.
Some contracts contain no automatic FIRPTA provision at all. Others address FIRPTA through a separate addendum, certification, or disclosure. And even where FIRPTA language is incorporated into a standard contract, it may appear deep within the contract provisions rather than as something that immediately alerts the Realtor, buyer, or seller that this particular transaction may involve a federal withholding obligation.
In other words, the fact that FIRPTA language exists somewhere in a contract doesn't necessarily mean anyone will recognize the issue early.
A contract provision can explain FIRPTA. It can't recognize a foreign seller.
Someone still has to connect the dots.
The Legal Responsibility Generally Starts With the Buyer
Under FIRPTA, the buyer is generally the withholding agent when purchasing a U.S. real property interest from a foreign person.
If withholding is required, the buyer generally has the federal responsibility to withhold the appropriate amount and remit it to the IRS.
But there is an obvious practical problem:
How many ordinary homebuyers know what FIRPTA is before someone tells them?
A buyer may reasonably assume that the Realtor, principal broker, closing attorney, title company, accountant, or another professional involved in the transaction will identify unusual requirements.
Waiting for the buyer to discover a federal withholding obligation they may never have heard of isn't much of a risk-management strategy.
What About the Realtor and Principal Broker?
A Realtor is not automatically the FIRPTA withholding agent simply because they are involved in the transaction.
But that doesn't mean FIRPTA should automatically be treated as somebody else's problem.
A Realtor doesn't need to become a FIRPTA tax specialist.
But a Realtor dealing with foreign buyers and sellers should know enough to recognize a potential FIRPTA issue, raise the question early, and know when qualified assistance should be brought into the transaction.
From my own years as a principal broker and owner of residential and commercial real estate brokerages—and now as the founder and FIRPTA tax professional behind FIRPTA Refunds, providing specialized FIRPTA services nationwide since 2008—I have seen these transactions from both sides.
I have always believed that an important part of running a brokerage is identifying material transaction risks and educating the Realtors you supervise to recognize them.
FIRPTA is one of those risks.
A contract provision can certainly help. But a contract clause isn't an education program.
The goal isn't to turn Realtors into tax professionals. It is to make sure they recognize when something falls outside the ordinary transaction and should be addressed before it becomes a problem.
FIRPTA Refunds currently provides 17 specialized FIRPTA service areas, covering matters from transaction assessment and closing compliance through withholding certificates, ITINs, difficult IRS cases and post-closing tax reporting.
See FIRPTA Refunds Services:
What About the Closing Professional?
Depending upon the state, transaction, and role being performed, a closing attorney, title company, escrow agent, or other settlement professional may become heavily involved in the FIRPTA compliance process.
But timing matters.
By the time the transaction reaches the closing professional, valuable planning time may already have been lost.
Identifying foreign-seller status when the listing is taken, the offer is prepared, or the contract is negotiated provides considerably more time to determine whether FIRPTA applies, what documentation is required, and what options may be available.
Discovering it shortly before closing can turn something manageable into an unnecessary scramble.
When FIRPTA Gets Missed, Problems Can Get Expensive
Unexpected withholding. A seller may learn late in the transaction that a substantial amount of the sales price may have to be withheld at closing.
Buyer exposure. Because the buyer is generally the withholding agent, improperly handled withholding can create substantial federal tax exposure for a buyer who may have known nothing about FIRPTA.
Closing delays. Foreign status, exemptions, withholding certificates, certifications, ITINs, IRS filings, and other documentation can interfere with an otherwise ready-to-close transaction.
Post-closing problems. Incorrect forms, identification information, withholding, or remittances can become IRS problems long after everyone thought the transaction was finished.
For a more detailed discussion of the potential financial consequences:
FIRPTA Liability Risks Explained
And then there is the question no real estate professional wants to hear from a client:
“Why wasn't I told about this earlier?”
Early Identification Can Also Create Opportunity
FIRPTA isn't only about avoiding problems.
When identified early, the facts can be reviewed to determine whether an exception applies, reduced withholding may be available, a withholding certificate should be considered, or another appropriate approach may be available.
Those possibilities are considerably easier to evaluate before closing than at the closing table.
That is where knowledgeable professionals add value—not by trying to become FIRPTA experts themselves, but by recognizing the issue early enough to get the right people involved.
So, Who Catches It?
Legally, the federal withholding responsibility generally starts with the buyer.
Operationally, however, a successful transaction may involve several professionals.
The Realtor can recognize it.
The principal broker can educate for it.
The closing professional can properly address it.
The FIRPTA specialist can help determine what actually applies and what options may be available.
And the buyer and seller can make informed decisions before a preventable FIRPTA problem reaches the closing table.
Have a FIRPTA Situation You're Not Sure How to Handle?
FIRPTA Refunds has specialized in FIRPTA matters since 2008, including withholding compliance, withholding certificates, ITINs, tax filings, refund recovery, and difficult post-closing IRS problems.
Whether the transaction is being negotiated, approaching closing, already closed, or something simply doesn't look right, we're always glad to take a look and weigh in.
FIRPTA Refunds, LLCYour FIRPTA Resource — From Contract to Closing and Beyond
Website: www.FIRPTArefunds.com
Email: RKahn@FPG-USA.com
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