Under the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA), buyers are responsible for withholding either 10 or 15 percent of the purchase price when the seller is a foreign person. FIRPTA covers sales and dispositions of U.S. real property interests by a foreign person.

One of the quirks of FIRPTA is that the buyer, even if a U.S. citizen or domiciled corporation, is responsible for withholding the required amount and sending that amount to the IRS. The buyer is also generally responsible for completing and submitting Form 8288 or Form 8288-A.

Failing to submit the required amount to the IRS may leave the buyer responsible for covering the unpaid amount. The IRS code states that buyers can be personally liable for any unpaid tax required under FIRPTA. The buyer may also be responsible for any unpaid interest.

For example, a buyer purchases a property from a foreign seller for $2 million. The seller didn't obtain a withholding certificate, meaning the buyer should send $300,000 to the IRS. If neither the buyer nor seller pays the tax by the due date, the seller is then obligated to pay the tax and any interest that accrues between the due date and the date the tax is finally paid.

A buyer is responsible for knowing that a property sale or transaction falls under FIRPTA, as well as their legal obligations when the seller is a foreign person. By failing to submit the required withholding amount, the buyer can become personally liable for paying the tax.

Withholding Certificate

The seller, not the buyer, can obtain, ideally before closing, a withholding certificate that eliminates or reduces the amount the buyer is required to withhold. The buyer has little active role in any withholding certificate, other than needing to know whether the IRS has approved the seller's application.

When the seller has applied for the certificate, but the IRS has not approved it by the close, the buyer should put the full withholding amount into an escrow account. The buyer can then send the money to either the IRS or the seller once the IRS decides on the withholding certificate.

Buyers should take care not to fail to withhold the required amount before the IRS approves the seller's request. Assuming that the IRS will approve and sending the money to the seller may result in the buyer being personally liable for paying the required tax.

If you have questions about FIRPTA, call Senior Partner, Tax Controversy Attorney, and former IRS attorney Brandon A. Keim at (602) 200-7399 or contact him online to discuss your options.