Real Estate Q&A: Buyer Must Collect Tax from Foreign Seller

Real estate Q&A: Buyer must collect tax from foreignseller

FORT LAUDERDALE, Fla. – July 18, 2013 –Question:I am buying a home from a foreign investor. The closing agent is telling me that I need to submit a tax return and 10 percent of the sales price to the Internal Revenue Service. Is this for real? – Albert

Answer:Yes. The Foreign Investment in Real Property Act was created more than 30 years ago to ensure that foreigners who own property in the United States pay the taxes due on the sale. The law puts the burden of collecting the tax on the domestic buyer, requiring you to collect and submit 10 percent of the full sales price.

This money comes from the seller’s proceeds, but the buyer is responsible for making sure that the money is submitted, and the buyer can be held accountable if it is not. This 10 percent requirement exists even if the property is heavily mortgaged, creating an issue with short sales. As with any tax, there are many rules and exceptions here.

The most common exception to collecting the tax: when the cost of the home is less than $300,000 and the buyer will occupy the home at least half the time it is used over the next two years.

The closing agent may want you to sign an affidavit that you are planning to satisfy the occupancy requirement. If you sign the affidavit and don’t end up living there, the IRS could later come after you and make you pay the tax yourself.

This entire issue can be avoided by insisting that the seller apply to the IRS well in advance of the closing to determine how much tax, if any, will be due.

About the writer: Gary M. Singer is a Florida attorney and board-certified as an expert in real estate law by the Florida Bar. He is the chairperson of the Real Estate Section of the Broward County Bar Association and is an adjunct professor for the Nova Southeastern University Paralegal Studies program.

The information and materials in this column are provided for general informational purposes only and are not intended to be legal advice. No attorney-client relationship is formed. Nothing in this column is intended to substitute for the advice of an attorney, especially an attorney licensed in your jurisdiction.