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FIRTPA is the acronym for Foreign Investment in Real Property Tax Act. The purpose of the act is to address the concern that it would be extremely difficult, if not impossible, to collect income tax from a taxpayer who resides abroad, especially if – after the sale – he or she does not own real estate property in the United States anymore.
FIRTPA rule is that the Buyer shall withhold 15% of the purchase price of a real estate transaction. As for every rule, it has certain exceptions: here we provide a list of the most common ones:
Unless Buyer or his or her agent knows that the certification Seller provided is false, Buyer can always rely on it and it goes exempt from every sanction in connection with the veracity of the statement.
Buyer can be required to furnish a copy of the certification to the IRS promptly and following a certain provision; should Buyer fail to do so in the time and manner prescribed, the certification will not be effective.
If Buyer, its real estate agent or the closing agent has actual knowledge that the certification is false, the real estate agent or the closing agent must notify Buyer, or they will be held liable for the tax within the limit of the compensation received for the transaction.
However, a Withholding Agent is personally liable for the full amount of FIRPTA withholding tax required to be withheld, plus penalties and interest. A Withholding Agent is any person having the control, receipt, custody, disposal, or payment of income that is subject to withholding.
You are protected in a FIRTPA situation as typically the Withholding Agent personally covers the risk connected to the withholding, but having somebody who has experience in international real estate transactions and who knows exactly how to face their challenges helps.
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