- The Deed, typically a Warranty Deed, is signed by the Seller confirming the transfer of the ownership of the property and then recorded in the county for public records.
- The Bill of Sale confirms that all personal property that was listed in the contract was received by the Buyer, such as any equipment.
- The Owner’s Affidavit will confirm that the Seller is a non-foreign person so no FIRPTA will need to be withheld for this transaction. The Owners Affidavit will also confirm that the property is in the same condition from when the contract was first created, meaning there are no outstanding contracts, no liens, mortgages, claims, boundary disputes, and there are no violations pertaining to the property.
- The Closing Statement will have an itemized and detailed breakdown of all closing costs for the transaction, identifying the chares to the buyer and the seller. A closing statement should include:
- Property details. The closing statement should include basic information about the property, such as the address where it’s located, when it was built, and the type of structure it is (i.e., single-family home, multifamily home, manufactured home, etc.).
- Financial information. The closing statement should also detail the purchase price of the property, deposits paid by the Buyer, and Seller credits.
- Prorated amounts. If a Buyer or Seller is paying prorated amounts toward property taxes or association fees, then these also would be included on the closing statement.
- Loan costs. This section of the closing statement would include information relating to the loan, such as points paid, underwriting fees, application fees, and origination fees. Mortgage insurance premiums and prepaid interest also would be included here.
- Miscellaneous loan costs. Other loan costs would be listed under a separate section. That includes appraisal fees, credit report fees, and research fees. Survey fees, inspection fees, and pest inspection fees also would be included on the closing statement.
- Escrow and recording fees. Escrow charges are detailed on the closing statement, along with any recording fees charged by government entities to record the transaction.
- Commissions. The closing statement also would specify what was paid in real estate commissions to the Buyer’s agent and the Seller’s agent. These costs are typically paid by the Seller out of the proceeds of the sale.
- Loan Package is involved if there is a loan purchase, then the Buyer’s Lender will provide the lender closing package for the Buyer to sign.
- A Promissory Note will be signed by the Buyer when obtaining a loan as part of the purchase. The Note, which is Buyer’s promise to repay the loan according to the terms to which Buyer agreed. It will also explain what will happen if Buyer fails to make a payment on time.
- For a foreign Seller, a FIRPTA Certificate may be required.
WHAT IS FIRPTA? The Foreign Investment in Real Property Tax Act was made federal law in 1980. This piece of legislation was designed to prevent foreign investors from purchasing and selling large amounts of American farmland, tax-free. FIRPTA seeks to prevent foreign investors from avoiding capital gains taxes on the sale of various types of U.S. real property interest, from land to stocks and bonds. The Foreign Investment in Real Property Tax Act still exists today and primarily impacts Americans that engage in real estate transactions with foreign people or corporations.
Under FIRPTA, a portion of the capital gains from a transfer of property between an American and a foreign person or company must be withheld. While the IRS imposes a standard rate, the exact amount withheld will depend on the gain from the sale itself.
FIRPTA withholding can be a complicated subject. Since this concept may be widely unknown to Americans who have never done real estate or other transactions with foreign persons or corporations, it’s important to consult an experienced tax accountant. While you may be unaware of FIRPTA withholding requirements and all they entail, that does not make non-compliance okay in the eyes of the IRS. If you’re unsure whether you have to abide by FIRPTA after a recent property purchase, speak to a tax CPA.
FIRPTA is essentially a way to capture capital gains from foreign investors when they sell property. Because there is generally not an enforcement available to the IRS in the event such taxes are not paid, FIRPTA shifts that obligation to the buyer.
However, the tax liability isn’t necessarily collected from the “foreign person” (as defined by FIRTPA). The obligation can fall upon the person buying US real estate from a foreign person. Buyers purchasing a home from a foreign person may be obligated to withhold an amount from the seller’s proceeds (either 10 or 15%) to remit to the IRS along with Form 8288 within 20 days of their purchase.
Note that this withholding is not a final tax, and much or even all of it may be refunded when the foreign person files their taxes.
When Does FIRPTA Apply?
FIRPTA applies when the property being purchased is being sold by a “foreign person”. FIRPTA defines a “foreign person” as non-resident alien individuals who do not meet the substantial residency test, and foreign corporations, LLCs or partnerships.
A nonresident alien is defined for federal income tax purposes as an individual who is neither a U.S. citizen nor a resident of the U.S. within the meaning of the Internal Revenue Code. An alien individual is a resident of the U.S. for federal income taxes if he or she:
-
- Has been issued a green card (been admitted as a Lawful Permanent Resident in the U.S.) at any time during or prior to the calendar year; or
- Has maintained a “substantial presence” in the U.S., which means the alien (a) is physically present in the U.S. for 183 days or more during the calendar year or (b) if the alien is physically present in the U.S. for at least 31 days during the current year, the alien may be treated as a resident in the current year by the following calculation:
- Each day of presence in the current year is counted as a Full Day;
- Each day of presence in the 1st preceding year is counted as 1/3 of a Day;
- Each day of presence in the 2nd preceding year is counted as 1/6 of a Day
If the total of (1) + (2) + (3) is 183 days or more, the alien may be a U.S. tax resident unless the alien files certain required information with the IRS to claim the benefit of any relevant exception.If the foreign person is neither a U.S. citizen nor falls within description (1) or (2), he or she is a nonresident alien and is subject to FIRPTA withholding unless an exception applies.
However, not all US properties being sold by a “foreign person” are subject to FIRPTA. If the sale price is under $300,000 and the buyer plans to occupy the property as their primary residence, they are not required to withhold anything under FIRPTA.
If the property price is $300,000 or more, then there are two potential withholding rates depending on the situation. For properties between $300,000 and $1,000,000 where the buyer intends to occupy the property as their primary residence, a 10% withholding rate applies. For all other properties, a 15% withholding rate applies.
Your FIRPTA obligations as a buyer, seller or realtor
If a buyer is purchasing a property from a foreign person or entity and FIRPTA applies, the buyer is required to complete the required forms (8288 and 8288-A) and submit the applicable withholding amount to the Internal Revenue Service. The buyer’s agent, title company or lender is not responsible for doing this. We recommend that buyers have their lawyer or tax advisor assist with preparing these forms.
Buyer’s agents should take care to confirm the residency status of the seller to determine whether FIRPTA applies. Most standard sale contracts include a clause where the seller must confirm if FIRPTA applies or not. If it does apply, the buyer and their agent can work with the seller and their agent to establish what needs to be withheld.