Help! I owe thousands of dollars to IRS because of sellers failure to pay taxes

As a buyer of real estate in the United States, did you know you could be liable to the IRS due to failure of foreign national seller to pay taxes?

That was not a typo, if you buy a property from a foreign national, the buyer is technically responsible for withholding tax of 10% of the sale! And yes, you will get a bill from the IRS, they don’t play. It’s all about FIRPTA – The Foreign Investment in Real Property Tax Act

FIRPTA General Rules

The Foreign Investment in Real Property Tax Act (FIRPTA) requires a FIRPTA withholding tax of 10% of the amount realized on the disposition of all U.S. real property interests by a foreign person. A buyer of U.S. real property interest from a foreign investor is considered the (transferee) and also the withholding agent. The transferee must find out if the transferor is a foreign person. If the transferor is a foreign person and the transferee fails to withhold, the buyer may be held liable for the tax. The seller must report that sale of the real property interests by filing a U.S. Federal Tax Form 1040-NR or Form 1120-F.

Obligation of the Buyer/Withholding Agent

If you are a foreign person or firm and you sell or otherwise dispose of a U.S. real property interest, the buyer (or other transferee) becomes the withholding agent and may have to withhold income tax on the amount you receive for the property (including cash, the fair market value of other property, and any assumed liability). Corporations, partnerships, trusts, and estates also may have to withhold on certain U.S. real property interests they distribute to you. See Reporting and Paying Tax on U.S. Real Property Interests.

Remittance of Withholding Tax

The withholding agent must remit the withholding of tax to the IRS by the 20th day of the date of the transfer on Form 8288, U.S. Withholding Tax Return for Dispositions by Foreign Persons of U.S. Real Property Interests. The withholding agent must also attached to Form 8288 a Form 8288-A, Statement of Withholding on Dispositions by Foreign Persons of U.S. Real Property Interests, for each person for whom tax has been withheld.

This is one of the many reasons you should work with a Miami Realtor that has your best interest at hand. A good real estate agent will make sure you are working with a closing agent that will properly advise you and will recommend an attorney that knows FIRPTA well. A good Miami Realtor will make sure the withholding shows on the final HUD (closing statement) and they will get proof of payment to the IRS from the seller.  You don’t want to get stuck with a hefty bill months after your closing because of a “technicality”. Thank you to our Surfside clients, Evie and Diego for the blog fodder!! **remember we are not attorneys and will not give you legal advice – we always recommend you consult with an attorney or legal professional