Buyer Liability for Seller’s Tax under FIRPTA: Another Great Reason to Use WaLaw

October 7th, 2011 by Marc

This is not legal advice.  For legal advice, consult an attorney about your specific situation.  Never rely on a blog – even one authored by an attorney.

I just authored a post on Rain City Guide regarding a buyer’s potential liability under a federal law, the Foreign Investment in Real Property Tax Act (FIRPTA).  If you don’t have time to check it out, here’s the quick-n-dirty:

FIRPTA requires a buyer to determine whether the seller of real property is a “foreign person” as defined by the act (essentially any non-resident alien).  If the seller is a foreign person, then the buyer is responsible for withholding 10% of the sale price and forwarding it to the IRS.  This insures that the seller pays the tax due on the gain from the sale.

Here’s where it gets really interesting: if the seller is in fact a “foreign person,” yet the buyer fails to so determine and fails to withhold and forward the 10% to the IRS, then the buyer is liable for the 10%.  Ouch!  That’s quite a bite!  The current NWMLS form contracts specifically inform the Closing Agent to make this determination and to withhold these funds on the buyer’s behalf if appropriate.  However, most escrow instructions (which supplement the contract) relieve escrow of this responsibility.  As a result, most Closing Agents don’t determine whether seller is a foreign person and won’t withhold the funds.  So if you’re the buyer, and if the seller is indeed a foreign person, you run a risk of serious liability to the IRS absent this determination and withholding.

At WaLaw, we’re lawyers.  It is part of our job to insure you comply with the law.  Unlike your average real estate agents (I suspect “almost all” is more appropriate) we appreciate this law and the obligations it imposes, plus the penalty if you don’t comply.  When you hire us, you know that you won’t fall into this trap.  Oh, and you’ll save alot of money, too!