FIRPTA comes full circle in Agreement of Sale

The Foreign Investment in Real Property Tax Act, or FIRPTA, which was enacted more than three decades ago, makes sure that the IRS can collect taxes from “foreign persons” who sell real estate within the United States.

This particular provision of the Internal Revenue Code is unique in that the buyer of the property is responsible for withholding the tax owed by the seller, who might otherwise be able to evade the reach of the IRS.

It’s a weird law that only applies in a weird set of circumstances (in residential sales, where the property will not be used as a main residence and the amount realized is no more than $300,000), which means that it doesn’t apply to most residential resale transactions. But when it does apply, it’s a big deal, and when it applies, but the parties didn’t know about it in advance, it can be a big problem. The parties can run into closing delays, unexpected costs and the buyer can end up being personally liable to the IRS.

Since 2010, the PAR Agreement of Sale has had a notice describing FIRPTA and directing the parties to determine if it might apply. In the past few years PAR has been made aware of a number of problem transactions where the parties didn’t do their FIRPTA homework and big problems presented themselves, resulting in liability for our members. To help alleviate these issues and draw more attention to the issue, the Standard Forms Committee decided to switch from a general notice paragraph (that was apparently not being noticed) to a setup involving two checkboxes which would force the parties to read it and select one of the two options depending on whether FIRPTA withholding is required.

The good news: Members noticed the paragraph! We received some of the most feedback on this change than anything in quite some time. The bad news: Members did not do a good job of utilizing it. Apparently a lot of licensees didn’t understand the basic concept and were incorrectly completing the checkboxes in ways that were creating liability more than limiting it.

As a result, when the Standard Forms Committee met in January they decided to revert to the former notice-style paragraph until we figure something out, both in terms of the words contained in the Agreement and in terms of member education. You will see the notice language go back into Paragraph 23 of the ASR on Monday, Feb. 20, but be aware that it may change again later this year or next year based on task force recommendations.

Please be aware that this is a change to the content of the ASR and not a change to the law itself. If FIRPTA applies to your client’s transaction, you must comply with the provisions of the Internal Revenue Code. If you have run into FIRPTA issues – especially if you have a story or a form you’ve used – let us know.