Do, Don't, Do, Don't OMG!

Every agent should be familiar with The Foreign Investment in Real Property Tax Act of 1980 ("FIRPTA") which requires withholding when a foreign person or entity disposes of an interest in real property located in the United States unless the transaction meets one of the exemptions form the withholding requirement. However, what do you do when you have a short sale involving a foreign seller?

Many fall into a trap thinking that there is no FIRPTA withholding in a short sale because the seller does not receive any net proceeds from the closing. This is not true!!! There is no exemption from FIRPTA withholding for a short sale simply because it is a short sale. Just because the seller does not receive cash at closing does not mean that the "amount realized" by the seller is zero dollars. Under the Treasury Regulations (Treasury Reg. 1.14451 (g)(5)), the " amount realized" by the seller for purposes of determining whether to withhold under
FIRPTA is the sum of:
- The cash paid or to be paid
- The fair market value of other property transferred or to be transferred, and
- The amount of any liability assumed by the buyer or to which the property is subject immediately before and after the transfer.

Information provided by: Old Republic