A. It’s the capital gains tax owed when selling real property.
B. It applies to any seller who lives abroad.
C. A buyer of real property must submit 10% or 15% of the sales price to the IRS for an applicable transaction.
D. All of the above. 

Answer: As background, FIRPTA is the acronym for the Foreign Investment in Real Property Tax Act (FIRPTA). The Internal Revenue Service (IRS) uses FIRPTA as a way to help ensure the collection of capital gains taxes that may be owed by “foreign persons” (as defined) who sell their real property in the U.S. To accomplish that goal, the IRS requires 10% or 15% of the sales price for an applicable transaction to be withheld from the seller’s proceeds, and submitted to the IRS instead. The FIRPTA withholding is 10% if the buyer will be owner-occupying a property priced up to $1 million; otherwise, the withholding is 15%.

Answer A is wrong. The 10% or 15% amount is a tax withholding. It may not necessarily be the actual capital gains tax owed by a particular seller-taxpayer. During tax season, the seller-taxpayer who had 10% or 15% withheld at close of escrow, will file his or her annual income tax returns showing the actual amount of capital gains tax owed. If the amount withheld is more than the actual tax owed, the seller-taxpayer may get a tax refund from the IRS. If the amount withheld is less than the actual tax owed, the seller-taxpayer may have to pay more money to the IRS.

Answer B is also wrong. A FIRPTA withholding is generally required for a “foreign person,” which excludes U.S. citizens and resident aliens, regardless of where they live. There are other FIRPTA exemptions as well. To take advantage of an exemption, a seller must generally complete and provide escrow with a Seller’s Affidavit of Nonforeign Status (such as C.A.R.’s Form AS).

Answer C is the correct answer. To help ensure the collection of taxes, the law actually places a burden on a buyer of real property to do the FIRPTA withholding if applicable. Of course, in our day-to-day practice, the buyer delegates that responsibility over to escrow, under paragraph 11H of the RPA.

More Information: For more information, take a look at C.A.R.’s FIRPTA Q&A (password-protected for C.A.R. members only).

-Thank you to Greg Bull (Pasadena Office) for suggesting this week’s legal tip!

Copyright© 2023 Berkshire Hathaway HomeServices California Properties (BHHSCP). All rights reserved. Any unauthorized reproduction or use of this material is strictly prohibited. This information is believed to be accurate as of November 27, 2023. It is not intended as a substitute for legal advice in individual situations, and is not intended to nor does it create a standard of care for real estate professionals. Written by Stella Ling, Esq.