Benjamin Franklin once said in a letter to Jean-Baptiste Leroy, “Our new constitution is now established, and has an appearance that promises permanency; but in this world nothing can be said to be certain, except death and taxes.” And although he wrote that letter in 1789, the certainty of death and taxes still applies, and the taxes part may apply to you if you are a foreign person or non-resident alien purchasing or selling property in the United States.
If you are a foreign person or non-resident alien purchasing or selling real estate in Arizona you need to be aware of the section of the residential purchase contract that explains your potential tax obligations. That section currently states, “Seller agrees to comply with IRS reporting requirements. If applicable, Seller agrees to complete, sign, and deliver to Escrow Company a certificate indicating whether Seller is a foreign person or a non-resident alien pursuant to the Foreign Investment in Real Property Tax Act (“FIRPTA”). Buyer and Seller acknowledge that if the Seller is a foreign person, the Buyer must withhold a tax equal to 10% of the purchase price, unless an exemption applies.”
According to the IRS, the Foreign Investment in Real Property Tax Act of 1980 was enacted to treat foreign and domestic investment is U.S. real property more comparable. According to Equity Title Agency in Scottsdale, AZ, the deposit of 10% is held by the IRS until the Seller files income tax returns at the end of the year, at which time any taxes owed are deducted and the balance refunded to the Seller. If no tax is due, the entire amount held is refunded. If the Seller obtains an exemption certificate or waiver from the IRS, the funds can be immediately released to the Seller. And, if the Seller is a non-resident alien the sale may still be exempt from FIRPTA withholding if the sale is for less than $300,000 and the property will be the buyer’s residence. “Buyer’s residence is defined as a personal residence used by the buyer or member of the buyer’s family for a least one half of the days the property is used by an individual during the first two years after the sale.
The U.S. tax code is complicated and changes regularly. The above information is by no means a complete statement of the rules under FIRPTA and should not be construed as legal or tax advice. It is provided for informational purposes only. Neither your real estate agent nor an escrow officer can give you advice as it relates to FIRPTA. When in doubt, always seek professional legal and/or tax advice. Contact us TODAY at 480-756-6372 or email us at emailus@TheHillGroupAZ.com for a FREE copy of Equity Title Agency’s Foreign Investment Guide.