The Basics of FIRPTA Withholding Tax

When getting prepared for settlement, one of the concerns of every settlement company is whether the seller is affected by the Foreign Investment Real Property Tax Act (FIRPTA).  In fact, all settlement companies will require the seller to sign an affidavit stating they are not subject to FIRPTA.  If the seller cannot or will not sign the affidavit, then ten percent (10%) of the sales price is collected at settlement and paid directly to the IRS by the settlement company.  Below are some commonly asked questions with some basic answers.


When is your client affected by FIRTA?
When the property sales price over $300,000 and your client is a foreign person i.e. does not participate in the US tax system.

What does my client need to do?
Apply for an exemption by filing an IRS Form 8288 on or before date of settlement OR pay 10% of the sales price directly to the IRS via the closing agent.

NOTE:  If your client does not have a tax identification or social security number, then your client will also be required to file a W-7 form at the time of either filing for an exemption or paying the tax.

How is my purchaser affected by FIRPTA?
If the seller is foreign and does not pay the requisite tax or file for exemption; then your purchaser is on the hook for paying the tax.

NOTE:  If both the seller and the purchaser are foreign, your purchaser will be required to file a W-7 form if your purchaser does not already have a tax identification or social security number. Your purchaser’s tax identification number must be on the seller’s form whether filing for exemption or filing to pay the tax.

Can any of the paperwork be filed in advance?
Yes, the requisite forms can be filed as soon as you have a ratified contract. You will need to get the purchaser’s information i.e. SSN, address, etc., in order to do so.

How long does it usually take the IRS to grant an exemption or give a decision as to the exemption?
Typically it takes 90 days to receive a certificate of exemption, partial exemption or non-exemption.

Who usually files the requisite forms?
If the seller is paying 10% of the sales price as part of settlement, then the settlement agent/attorney will file the forms and pay the money directly to the IRS.

If the seller wishes to file for an exemption, then the seller hires the settlement agent, a tax attorney or an accountant to file the forms. There is usually an additional fee to handle the exemption filings.

If you need any further information or need the forms, visit http://www.irs.gov/.

The Basics of Maryland Real Estate Withholding Tax

There have been occasions when I have been at the settlement table and the Maryland Withholding Tax becomes a major surprise to the seller.  The seller is surprised when I place an affidavit in front of him asking him to state that he is a Maryland resident and he is not.  Below is some basic information about the Maryland Withholding Tax.


When is your client affected by Maryland Withholding?
Your client is affected if your client is not a Maryland resident and has not lived in the property as his/her principal residence for 2 out of the last 5 years.

If your client is an entity, your client is affected if the entity is:
1) A “nonresident entity” is defined to mean an entity that: (a) is not formed under the laws of Maryland more than 90 days before the date of sale of the property, and (b) is not qualified by or registered with the Department of Assessments and Taxation to do business in Maryland more than 90 days before the date of sale of the property; or
2) A Trust that was a not formed under Maryland law and/or not governed under Maryland Law; or
3) An Estate where the decedent was not a Maryland resident.

What does my client need to do?
Apply for an exemption by filing a Maryland Form at least 21 days before date of settlement and received an exemption certificate OR pay 7.5% if an individual or 8.25% if a non-Maryland entity of the sales proceeds directly to the State of Maryland via the closing agent at settlement.

How is my purchaser affected by Maryland Withholding?
Your purchaser is not affected at all by Maryland Withholding.

Can any of the paperwork be filed in advance?
Yes, the requisite forms can be filed as soon as you have a ratified contract.

How long does it usually take the State for Maryland to grant an exemption or give a decision as to the exemption?
Typically it takes 21 days to receive a certificate of exemption, partial exemption or non-exemption.

Who usually files the requisite forms?
If the seller is paying 7.50% (or 8.25%) of the sales proceeds as part of settlement, then the settlement agent/attorney will file the forms and pay the money directly to the State of Maryland.

If the seller wishes to file for an exemption, then the seller hires the settlement agent, a tax attorney or an accountant to file the forms. There is usually an additional fee to handle the exemption filings.