Understanding FIRPTA Withholding and How it Can Affect the Escrow Process
What are the top three things to keep in mind when it comes to FIRPTA withholding? 1. The foreign seller is the subject of the withholding. 2. When withholding is applied at the closing of the property being sold, the foreign seller must have an ITIN (Individual Tax Identification Number). 3. Ten percent of the sale price up to $1,000,000 and 15% of values beyond $1,000,000 is the withholding amount.
The above 3 factors are what every escrow officer should instantly focus their attention on when beginning a transaction, particularly when there is a Seller with a foreign name. Keep reading to learn more about this topic. Remember that at Neighborhood Escrow we are always up to date on the latest escrow topics.
Foreign names are not always used by foreign sellers
A Canadian seller, for example, could have a Western name, but since Canada is not a part of the United States, he may be a foreigner. If so, we hope he would let his real estate agent know so that it may be brought up when the deal is opened.
About that ITIN
The second query is, “Does he/she/they each have their own individual tax identification number (ITIN)?” if we are aware up front that we have a foreign seller. If not, we hope they will immediately submit an application for one. It would be convenient to have an ITIN to include on the papers if we need to make a withholding for them so that the IRS knows to whom to credit this payment.
There are three stages of withholding that must be considered if we must do the withholding:
Tier 1: No withholding is necessary if the property selling price is less than $300,000 and the buyer certifies in a Buyer’s Affidavit that they will reside on the property.
Tier 2: If the sale price of the property is $1,000,000 or less, 10% of the sale price will be withheld.
Tier 3: If the sale price of the property is $1,000,001 or higher, 15% of the sale price will be withheld.
An escrow agent can answer questions about FIRPTA withholding and other issues
If you have questions about your escrow process, your escrow agent should be able to help you. If you are working with Neighborhood Escrow, we can help – just call us at 310-378-2456 with any questions you might have about these and other transactions.
