FIRPTA is a Real Estate Transfer Tax for Foreign Sellers
The Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) authorized the United States to tax foreign persons (and entities) on the sale of United States real property interests. This withholding tax is to be collected at the closing of the sale and amounts to 10% of the purchase price if the sale is over $300,000 but less than $1,000,000 and 15% of the purchase price if the sale is over $1,000,000. For sales less than $300,000, provided the buyer occupies the residence at least 50% of the time, there is no tax collected. Typically in Oregon, this withholding tax is collected at closing by the escrow company and forwarded to the US Treasury.
The problem comes when the seller is a foreign person and the property is subject to FIRPTA but no tax is collected. In this case, the buyer can be held liable for the tax. This tax can amount to hundreds of thousands of dollars and is something the buyer should never have to pay, but the law provides for the buyer to be liable if the seller (the foreign person) does not pay.
In Oregon, during the economic recession, many properties were purchased by foreign investors. As the Oregon real estate market recovers, some of these investors are looking to cash in on their profits. The information on FIRPTA has been in Oregon's standard purchase agreements for years, but in 2019, the greater number of foreign owned properties for sale plus word that there have been IRS tax liens placed on Oregon homes purchased by innocent buyers in which FIRPTA was not paid has triggered additional forms and education for all Oregon real estate professionals.
Two new real estate forms Oregon Brokers are seeing are the FIRPTA Certification of Non-Foreign Status in which the seller provides their tax ID and certifies under penalty of perjury that they are NOT a foreign person and the FIRPTA Qualified Substitute Statement which is given to the buyer to certify that the escrow agent or Buyer's agent is holding the FIRPTA Certification of Non-Foreign Status. As it is not considered good practice to provide buyers with the seller's tax ID, this last document provides assurances to the buyer that this information is being held in the event the seller was not honest and actually is a foreign person. Only the escrow office, a closing attorney or the buyer's agent are allowed to be the "Qualified Substitute." In general practice, we do not know of an Oregon real estate brokerage who will take on the responsibility of being the qualified substitute and hold the certification of non-foreign status and to date, it is escrow taking on this role. Both documents are the only way we know, based on current law, to assure that buyers are protected if the FIRPTA tax is not paid.
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