This episode breaks down FIRPTA withholding requirements when purchasing real estate from foreign nationals, using a near-miss $50K tax surprise on a high-value transaction as the teaching example.
Key Takeaways:
- Foreign Sellers Trigger 15% Withholding IRS requires buyers to withhold and remit 15% of gross purchase price when sellers lack US citizenship—on a $350K deal, that’s $52,500 sent to IRS at closing regardless of seller’s actual tax liability.
- Communicate FIRPTA Impact Immediately Waiting until day-before-close to address withholding risks deal collapse—sellers need advance warning their proceeds will be 15% lower upfront even if they receive refunds later based on actual tax situation.
- Title Companies Charge FIRPTA Fees Most title companies will handle form preparation and IRS submission for a fee rather than forcing buyers to manage complex paperwork and tight filing deadlines with 8%+ penalties.
Listen to the full episode for tactics on navigating foreign seller transactions without last-minute surprises.
(Podcast transcript below)
Welcome to Get Serious. So today I wanted to, uh, share a few tactics, uh, logistical items when dealing with foreign sellers for land or really any, uh, um, you know, real estate that has to be transacted, transacted within the U S. Um, so it has to deal with this thing called FIRPTA
So we actually dealt with this much more substantially, fairly frequently earlier on in our land journey, especially when we were doing more in-house closes and having to learn how to deal with the ins and outs of the tax associated and sending in the right forms, the IRS. But basically with FIRPTA is that
actually I’d have to double check, but I believe if the, seller of real estate, within the U S is a foreign national, or doesn’t have a U S citizenship, then, they have to pay a tax or really it, has to be a, tax on the property that is withheld.
or paid from buyer proceeds, so long as it’s not a primary residence. And generally it’s up to 15 % of the purchase price. So to break this down further, let me give you an example. Because the IRS doesn’t want to have to chase down funds,
and taxes from folks who aren’t us citizens, they basically put the onus on the buyer of the real estate to take care of those taxes and ensure they are paid. really at the time of, sale. you know, there’s a little bit of carry over time. but it’s like really quick triggers. I think if you don’t get paperwork into the IRS within even a matter of
a few weeks like interest rates just, you know, or there’s like 8 % plus penalties that happened pretty quickly. you basically have to treat it as an extra 15 % of funds that need to be sent in on top of whatever the purchase price is for the deal. And we’re talking like gross purchase price. So you know, if it was a $10,000
purchase then an extra $1,500 needs to be sent in to the IRS really at the time of sale. But again, the IRS puts the onus on the buyer to take care of that. So,
you know, ultimately.
Uh, even if the buyer is sending in those funds, it’s a tax liability for the seller. So depending on whatever their tax situation is, or maybe they’ve sold the real estate at a loss or something, like they might be able to recoup some of that money. It’s just the IRS requires that 15 % general, think it has sometimes 10%, but generally 15 % to be withheld at the time of sale. And then, you know, maybe some can be distributed back as far as.
return or refund to the foreign national seller later on, depending on their unique tech situation. So I remember when we were dealing with these, again, just doing self-closes, like it’s a lot more complex without title companies, because again, you have to deal with all these IRS forms and so forth. And so like we used to have…
Within our purchase agreements, say if you’re a foreign seller, like by the way, we’re going to have to adjust the price of the property to account for FIRPTA because it was going to be more money out of our pocket. It’s not like we could necessarily withhold proceeds or we would have to kind of work with the seller to have them understand, hey,
the route that we could do this is either, you know, we withhold 15 % of your anticipated proceeds compared to what’s on the purchase agreement. Or we have to proportionally decrease the purchase price on the property so that whatever that 15 % is from that’s needed by FIRPTA only
to that original purchase price that we had agreed on. So it’s like two ways to arrive at the same outcome ultimately. IRS still gets paid whatever they’re looking for effectively. But it just added in a whole bunch of complexity to dealing with that. yeah, it’s hard for sellers to fully understand. They’re like, yeah, well, like.
Why do have to do this? And it’s like, well, it depends on your own tech situation and you’re gonna have to deal with the IRS later on anyway, filing your tax returns. But ultimately that’s kind of the mechanism to keep in mind here. We hadn’t dealt with it in quite a long time. I honestly couldn’t remember the last time we had dealt with a foreign national seller.
But it did come up for this much larger transaction that we were pursuing recently. And I knew this individual was not a US citizen from the start, but I made quicker assumptions that, okay, yeah, title companies involved with it. they’re just going to deal with this process of handling the FERP deforms and withholding
taxes from the proceeds that we are submitting. But again, you should always want to be dealing with things faster and just kind of clarifying things, especially with sellers. And, you know, we get a lot of kind of loose cannon sellers in this industry for them to understand the implications of FIRPTA and how much, you know, their proceeds may be affected.
at the time of close and like their HUD could be significantly less because they’re basically paying all of their tax upfront compared to, you know, whatever tax they might owe on the property when they actually file their returns later on or to the U.S. government. Maybe they’re not even routinely paying to the U.S. government. If they don’t have other transactions, they’re not a citizen of the country.
So it’s just more of a hit upfront to them. So I wish we would have dealt with that earlier on because, and I just made too many assumptions with the title company. I’m like, yeah, they’re gonna deal with it. But we found out like the day before the close, it’s like, hey, you guys need to acknowledge that either you’re gonna deal with Ferp.afterclose just dealing with that outside of title, or we can prep the docs for you.
But again, like the wording is, hey, technically the buyer is responsible for paying this tax. So it was a very high purchase price deal where the tax was going to be like 50 some odd grand for the property. so like that would have destroyed the deal for us if the seller wasn’t on board and they’re like, hey, you guys need to cover this because technically it’s the onus is on you.
And this was like day before the close. had prepped everything prior to this, but we got the title company on the phone and we’re like, okay, you know, we understand. Yeah. You guys can handle this and prep the forms for us. Just tell us what, uh, what we need to do on our end. Yeah. It’s just like signing a handful of forms here. They’ll take care of this for a fee. Uh, yeah, no problem compared to having to do this, um, on our own here, just to ensure everything is squared away and solid. Um,
And yeah, the standard approach is just reducing the proceeds that the seller receives at the time of sale. But again, need to have them on board with that versus it becoming like a fight at the closing table. So ultimately we were able to sort that out and the seller had actually already researched and reviewed FERP because I guess the type of company had brought it up.
further in the past when he was first exploring paperwork. So that was a good sign. So he was aware, yeah, this is gonna be a tax hit that he’s gonna have to eat. And again, it all depends on the seller’s unique tech situation. If they had sold at a loss, they’re gonna get some of that money, refund it more than likely, depending on what other income they have within the country or anything.
And in this case, yeah, they were going to sell for profit. So assuredly they were going to owe some type of tax on the deal. Was it going to be the exact amount? You know, that raw 15 % that gets withheld off the bat, maybe, maybe not. I think it’s probably less than that because, you know, the FIRPTA is basically assuming a cost basis of zero for their tax. like whatever.
the property sells for, just taking 15 % off of that raw asset, you know, not accounting for the cost basis. So like if you’re only earning a dollar on it, then you you’d only pay 15 % of the income that you were making on that particular or the net income that you were making throughout your time of holding that asset. So
Again, you just have to account for, hey, you might be eating a larger tax upfront, almost assuredly, but more than likely some of that’s going to get remitted back. It’s just, again, the IRS is trying to be conservative with retaining funds for the purpose of taxes versus having to go hunt things down from foreign nationals, which is probably crazy hard to police. So I understand how they set up this mechanism.
prevents further nefarious activity besides you know just having to track down. I don’t know maybe you could create some sophisticated money laundering situations by you know working with foreign nationals and sell US real estate. Can’t quite work that out in my mind but I’m sure there are scenarios like that that they’re trying to prevent.
So just wanted to mention that there as far as understanding like some of these implications, because like, fortunately we had dealt with FIRPTA in the past, just had been a while. But like the land investor partner was just like, hey, we’ve never heard of this. it, you know, coming up again, pilot companies almost always is last minute paperwork coming up and then everybody’s scrambling like, my God, is this deal gonna fall apart in the 11th hour because…
Like we didn’t jump on this earlier enough. like over communicate. It’s always going to be better. Like, especially I knew that this scenario was going to come up, but I just, made too many assumptions that other parties involved in the deal were already taking care of it. So we kind of lucked out where the seller was already aware. but earlier on, like really, as soon as you have somebody who’s not a U S citizen coming in to potentially sell properties with like, Hey, are you aware of FIRPTA? it’s going to, you know, kind of significantly decrease.
your initial income from the sale of this property, but there’s a decent chance you’re going to get a lot more of that back once you file taxes. just to have that conversation earlier so it’s not at the closing table is what we would have changed here. So hopefully this is helpful to you dealing with situations like this. Ferp to ferp to ferp, I remember.
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