Got a dream to take them there
They're coming to America
Got a dream they've come to share
They're coming to America

I’m pretty sure that Neil Diamond didn’t have our current economic conditions in mind when he penned that song, but if ever there were a time those words were true it’s today.  Our home prices have been a bargain for many living outside the U.S. and many are now among the sellers out there competing for a limited but growing number of buyers. 

I wonder if FIRPTA means anything to the buyers today?  How about you? 

You may have noticed in passing that your real estate sales agreement includes a clause regarding FIRPTA or the Foreign Investment Real Property Transfer Act. For most agents this statement is immaterial to their transaction and something that is often ignored. For the luxury home specialist this clause can become an important consideration.

FIRPTA was enacted in 1980 and states that if a Seller of real property is a foreign person the Buyer must withhold a tax equal to 10% of the gross purchase price, unless an exemption applies.  For clarification, a resident alien is not considered a foreign person under the FIRPTA act. Under IRS guidelines a foreign person is a nonresident alien individual; a foreign corporation not treated as a domestic corporation; or a foreign partnership, trust or estate.

Like most tax provisions there are numerous exemptions to the FIRPTA requirements. Two of the most common:

• The seller furnishes a non-foreign affidavit stating under penalty of perjury that the seller is not a foreign person.
• Another exemption is a transaction involving the transfer of a property acquired for use as the buyer’s residence and the amount realized (purchase price) does not exceed $300,000.

Although FIRPTA generally provides that 10% of the purchase price must be withheld, the amount withheld should not exceed the seller’s maximum tax liability. The seller (or buyer) can request the IRS to determine the seller’s maximum tax liability with respect to the sale.

Any necessary withholding should be accomplished by requiring the escrow agent to withhold the required funds. The escrow company should be instructed to send the funds to the IRS at close of escrow. Additional information regarding this issue may be obtained in IRS Publication 515.

So why should we be too concerned – it’s an issue for the buyers/sellers and their tax professionals - right? 

Not quite so fast.

A real estate broker or salesperson for either party can be held liable for the tax that should have been withheld (up to the amount of compensation received), if the broker or salesperson has actual knowledge that the non-foreign affidavit is false and fails to notify the buyer and the IRS. Under certain circumstances, they may also be liable for civil or criminal penalties.

So a word to the wise here should be sufficient … our watchword … disclose!

And while we are on the subject, for many luxury home clients the need to insulate themselves from tax liability, and for some the need to protect themselves from frivolous legal actions, has caused them to place their assets into corporations or trusts.

Because of this, these legal entities in many cases will be acting as the purchaser, or seller in the transaction. When this is the case it is wise to ensure that the person signing the document has legal authority to do so. To ensure this is the case, many luxury home specialists ask some basic questions of their clients:

• Will you be taking title to the property in your own name or as another legal entity?
• Do you have a copy of the corporation or trust documents authorizing your purchase or sale? May I contact the person who has those documents to request a copy?
• Has the corporation or legal entity been registered (if necessary) with the local county or state?
• When signing documents, have you been instructed to sign with a title – manager, president, or trustee?

Unfortunately today we live in a very litigious environment and we need knowledge to protect ourselves … and caution in exercising that knowledge.  One place to gain that knowledge concerning the luxury home market is from the Luxury Home Council, through their Accredited Luxury Home Specialist (ALHS) course.  This course, offered exclusively through RealtyU, can now be taken online.  Click here for more information on the ALHS designation.