As a Floridian, you’ve probably noticed that Florida draws people from across the world to our beautiful beaches, sunny weather, and plethora of roller coasters. The diversity of our state is one of our hallmarks, but it also adds an extra layer when purchasing property from a foreign seller. The Foreign Investment in Real Property Tax Act (FIRPTA) was introduced in 1980, but many real estate agents, sellers, and buyers aren’t exactly sure what it means for them. As leading Orlando closing agents, we are here to explain what FIRPTA is, why it was enacted, and what it could mean for buyers and sellers.

What is FIRPTA?

FIRPTA impacts both the sale of property and income made off of renting of property by foreigners. The act is twofold.

First, FIRPTA requires that buyers of a real property from foreign sellers withhold 10 percent of the purchase price. Upon sale, the buyer has to transfer that 15 percent into an escrow account which ultimately goes to the Treasury Department. Buyers are the ones put in charge of withholding the 15 percent so that after the sale, the IRS is able to collect the money. If the seller was put in charge of the money, they’d have no connection to the US after the sale, making it more difficult to collect the 15 percent.

Second, if a foreigner has property in the states being held as a passive investment (with renters, for example), they may need to withhold up to 30 percent of the gross rental income.

Why Was FIRPTA Enacted?

Before the enactment in 1980, foreigners were able to purchase property and then sell it for a profit. Sellers weren’t taxed on those gains because they weren’t US citizens. The withholding requirements of FIRPTA went into effect in late 1984, and ever since, whenever a foreign seller makes a sale, the US Treasury Department is paid a tax.

How Does this Impact my Buyer or Seller?

If you’re representing a seller that is a non-resident alien individual as defined by FIRPTA, the tax will affect them. If you are representing a buyer purchasing from a non-resident alien, they will need to use IRS Forms 8228 and 8288-A to report the withholding and pay the IRS based on the real property sale price.

The Orlando Closing Agents at Real Estate Closing Solutions, LLC simplifies the complex process of FIRPTA sales. We work hand-in-hand with a CPA that is an expert in FIRPTA transactions and we work closely with the FIRPTA Department with the IRS.

For more information about the closing process, contact the Orlando closing agents at Real Estate Closing Solutions. Also, visit our online education center for more real estate resources!