Who FIRPTA affects
The Foreign Investment in Real Property Tax Act, implemented through Section 1445 of the Internal Revenue Code, 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. “Foreign person” includes nonresident alien individuals and foreign entities. Because the obligation falls on the buyer as the withholding agent, buyer’s counsel and the title agency both have strong reasons to confirm the seller’s status early in the transaction.
The general rule and the exceptions
The general withholding rate is 15 percent of the amount realized, which is typically the gross sales price rather than the seller’s gain. The regulations provide exceptions and reduced rates, including for certain residences the buyer will use as a home where the price falls below thresholds set by the IRS. Whether an exception applies depends on specific facts and requires documentation. Counsel should confirm the current rules and any available exception with a qualified tax professional rather than assuming one applies.
Establishing that a seller is not foreign
For most sellers, FIRPTA is resolved by a certification of non-foreign status signed under penalty of perjury and including the seller’s taxpayer identification number. Title agencies routinely include this certification in the seller’s closing package. When a seller cannot or will not sign it, the buyer should treat withholding as required unless an exception is documented. Entity sellers, trusts, and estates may raise additional questions about status that are best answered by the seller’s own tax adviser.
Withholding certificates and reduced withholding
A foreign seller whose actual tax liability is expected to be lower than the standard withholding may apply to the IRS for a withholding certificate authorizing a reduced amount. If the application is pending at closing, the withheld funds are typically held in escrow under a written agreement until the IRS responds, with procedures for remitting the funds once it does. This process takes time, so foreign sellers should engage a tax professional as soon as the property is listed.
Reporting after closing
Withheld amounts are reported and paid to the IRS using the forms the IRS designates for FIRPTA withholding, within a short deadline after the transfer. The closing file should make clear who is responsible for preparing and filing them, who holds the funds until remittance, and how proof of filing will be shared with the parties. Missed filings can expose the buyer to liability for the tax, along with penalties and interest, so the responsibility should be assigned in writing before closing.
New Jersey’s separate seller requirements
FIRPTA is a federal requirement; New Jersey has its own. Nonresident sellers generally must address the state’s gross income tax requirements at the time the deed is recorded, often by an estimated payment collected from proceeds unless an exemption applies. A foreign seller may therefore be subject to both federal withholding and the state estimated payment on the same closing. Counsel and the seller’s tax adviser should map out both obligations together so the settlement statement reflects them accurately.
This article is general information about New Jersey real estate transactions and is not legal, tax, or financial advice. Laws, regulations, and fee schedules change; confirm current requirements with your attorney. Crystal Alliance Title is a title insurance agency, not a law firm.
