One of the fortuitous things about running the listing side of the DeLeon Team is the exposure to the international real estate market. It is widely acknowledged that the DeLeon Team leads all Silicon Valley agents and teams in marketing to the international community.
Our efforts in this arena have taken Ken DeLeon and me to India, Russia, Singapore, Taiwan, Hong Kong, and mainland China on many occasions. In addition to marketing our listings, these trips have given us the opportunity to meet with foreign government officials and real estate industry leaders in an effort to better understand the rules, customs, and practices to which many foreign buyers are accustomed.
One of the first things that surprises many foreign nationals is how easy it is for them to buy property in the United States. Unlike many other countries, foreigners can buy U.S. real property, provided there is no vital national security interest involved. While media reports of waning interest from Chinese buyers abound, our experience paints a different picture. International buyers still comprise a significant portion of the buyer pool, particularly with luxury homes.
Although the U.S. government does not impose rules that discourage foreign ownership of U.S. real property, it is concerned about getting its tax on the gains from sale of this property. It is not hard to imagine that a foreign national, with no ties to the U.S., could forget to file their tax returns after all of the funds have been wired to them overseas. In an effort to enforce U.S. tax laws, Congress enacted the Foreign Investment in Real Property Tax Act of 1980 (IRC §§ 897 and 1445) to ensure that foreign buyers of U.S. real property pay their taxes.
The FIRPTA rules apply whenever a foreign person disposes U.S. real property interest. The rules provide that the withholding agents, generally the transferees/buyers, remit a portion of the total sales price to the U.S. government rather than to the sellers. If they fail to do this, then the buyers can be held liable for this amount. Historically, the rate has been 10 percent of the gross sales price (i.e., the total amount that the sellers received, including the assumption of debt), but this was recently increased to 15 percent for dispositions on or after February 17, 2016.
None of this should be a big deal from the point of view of the buyers. After all, the buyers still pay the same amount; it is just that 85 percent goes to the sellers and 15 percent goes to the U.S. government until the sellers file their tax returns.
However, this situation almost derailed a recent transaction in which I was the listing agent. In that case, the buyers were represented by a very experienced real estate agent from a large regional brokerage. The buyers worried about possible liability associated with the FIRPTA withholding on the transaction. Neither the agent nor the agent’s manager was familiar with the details of the FIRPTA rules.
Fortunately, I was able to provide a detailed written explanation to the buyers, and DeLeon Realty took the extraordinary step of indemnifying the other brokerage’s clients against any adverse action by the IRS. Although this particular transaction closed smoothly, it is but an example of how these types of laws can jeopardize a transaction if not thoroughly understood.