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Non-Resident Aliens to Pay More Tax at Real Estate Closing Time

On February 16, 2015, closing agents will be required to hold back 15 percent of the gross sales price when a foreign national is the seller of the real estate. This is the Foreign Investment in Real Property Tax that has been in effect since 1981 that requires foreign persons to pay U.S. Income Tax on the gains they make when they sell U.S. real estate. Until February 16, the withholding is only 10 percent of the gross sales price.

The FIRPTA tax is actually a tax that the buyer is required to pay if the tax is not withheld from the seller’s proceeds and remitted to the IRS within 20 days of closing. So it is the buyer’s responsibility to ensure that 1) the seller is not a non-resident alien of the United States, and 2) if he is, then direct the closing agent to withhold and remit the proper amount of tax to the IRS.

There are exceptions to the withholding, but we have always advised buyers to not assume the risk of not paying the seller’s FIRPTA tax based on the exceptions. Instead, it is advisable to always pay the tax and let the seller apply for a refund on their own.

The current FAR/Bar contract references a “10%” withholding, so — any contracts that will close after February 16, 2015, should be amended to read “15%”.

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