Many real estate agents representing buyer clients have come across properties being sold by a foreign person — or someone who appears to be a foreigner.
You may be unaware of the responsibility the buyer’s agent has in assisting buyer clients to evaluate and confirm the seller’s foreign status. The buyer also has a responsibility to collect foreign investment tax on behalf of the foreign seller.
Under 26 U.S. Code § 1445, the transfer of real property interests by a non-resident alien is subject to the Foreign Investment in Real Property Tax Act of 1980 (“FIRPTA”). FIRPTA authorizes the federal government to tax foreign persons selling real property interests.
In the transaction, the buyer of the property is required to collect the tax on the seller’s gain from the sale by withholding 15% of the sales price.
The Buyer’s Agent Responsibility
As a real estate agent/broker, the question arises as to what duty exists to accurately learn the seller’s citizenship and/or residency status. There are at least two ways you could become liable when assisting buyer clients.
First, if the broker knows the seller’s citizenship or residency status — or knows the seller misrepresented his status — the broker may face potential liability. The Internal Revenue Service (“IRS”) states that the buyer is the withholding agent and thus has the responsibility of finding out if the seller is a foreign person. Failing to complete this obligation will make the buyer liable for the tax.
Second, a buyer’s agent may face potential liability if the broker is asked (or volunteers) to investigate the status of the seller and fails to discover the truth of the seller’s status. The buyer’s agent faces potential liability as well if he/she fails to advise the buyer of the withholding obligation.
Advising Your Buyer Client
To avoid potential lawsuits concerning the buyer not fulfilling his or her duty, you should work with the title company to obtain the necessary documents including a Tax Identification Number from the seller.
If the seller is a foreign person, follow up by advising your client to hire a tax expert or attorney, as there may be possible exceptions to FIRPTA. Be wary of any alternative facts that influence the buyer into believing the seller is falsifying a Non-Foreign Certificate.
Remaining vigilant will help you avoid potential FIRPTA issues and allow you to continue your successful real estate business practice.
Have you represented a buyer client in a transaction where the seller was a not a U.S. resident? How smooth was your experience in helping to ensure the proper taxes were collected?
By: James M. Meseck and Haris A. Khan1
Law Offices Of White And Steele
Professional Corporation Dominion Towers, North Tower
600 17th Street, Suite 600N
Denver, Colorado 80202-5406
1 Summer Law Clerk/Intern
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