With so many foreign owners of homes in Phoenix, it is vital that all buyers understand the tax consequences of purchasing a home from a foreign seller. A Canadian homeowner selling their Phoenix property is considered a foreign seller.
Simply put, the Foreign Investment in Real Property Tax Act (FIRPTA) authorizes the United States to tax foreign persons selling US property.
What instructions are in the Arizona purchase contract?
The FIRPTA provision in the AZ purchase contract states “The Foreign Investment in Real Property Tax Act (“FIRPTA”) is applicable if seller is a non-resident alien individual, foreign corporation, foreign partnership, foreign trust, or foreign estate (“Foreign Person”). Seller agrees to complete, sign, and deliver to Escrow Company a certificate indicating whether seller is a Foreign Person. FIRPTA requires that a foreign seller may have federal income taxes up to 15% of the purchase price withheld, unless an exception applies. Seller is responsible for obtaining independent legal and tax advice.”
Persons purchasing US real property interests from non-resident aliens are required to withhold 15% of the purchase price and remit that amount to the IRS within 20 days of the transaction. Withholding is intended to ensure US taxation of gains realized on disposition of real property interests. The buyer is the withholding agent. If you are the buyer, you must find out if the seller is a foreign person or non-resident alien. If the seller is a foreign person/non-resident alien and you fail to withhold, you may be held liable for the tax.
A non-resident alien is defined as an individual who is neither a US citizen nor a resident of the US within the meaning of the Internal Revenue Code. An alien is a resident of the US for federal income taxes if they:
1. Have been issued a green card (admitted as a Lawful Permanent Resident in the US) at any time during or prior to the calendar year OR
2. Have maintained a “substantial presence” in the US, which means the alien is physically present in the US for 183 days or more during the calendar year
If the foreign person is neither a US citizen nor falls within description (1) or (2), they are a non-resident alien and subject to FIRPTA withholding unless an exception applies.
Exceptions:
• Home Use $300K Exception
Buyer is not required to withhold tax when buyer purchases real estate for use as their home and purchase price is not more than $300,000.
• Withholding Certificate
Buyer or seller may request a withholding certificate and IRS will generally act on these requests within 90 days after receipt of a complete application (Form 8288-B), including Individual Taxpayer Identification Numbers (ITINs) of all parties in the transaction. Form 8288-B requires a description of real property interest being sold, sales price, calculation of maximum tax owed and evidence that seller has no unsatisfied FIRPTA withholding obligation.
Summary of FIRPTA:
• Disposition of US real property interest by a foreign person is subject to income tax withholding
• Requires 15% of sales price be withheld as tax unless an exemption applies
• Buyer is responsible to report and withhold tax from foreign seller and pay it to IRS, not escrow officer or title company
• Seller can request a waiver or reduced withholding on IRS form 8288-B
• Tax withheld along with IRS forms 8288-A and 8288-B are due within 20 days of closing
