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Is a seller in breach of contract if he did not disclose that he is a foreign seller?

 

Closing on June 1st, was contacted by closing agent late on May 25th (holiday weekend) asking for social security number for FIRPTA.  This is the first time I heard that this was a foreign seller and I'm wondering why recourse I have.

 

Thank you.

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1 hour ago, RetiredinVA said:

What difference would it make if the seller is not a citizen of the US?  Unless citizenship of the seller is relevant, the buyer would be in breach of the contract and may be liable for damages.

 

Citizenship is relevant because if the seller is not a U.S. citizen or U.S. resident (as determined for tax purposes) then under the federal Foreign Investment in Real Property Tax Act (FIRPTA), codified in Internal Revenue Code (IRC) sections 897 and 1445, the buyer is obligated to withhold 10% of the gross sales price and remit that to the IRS. This withholding is meant to ensure the foreign person pays the tax on the gain realized on the sale. It therefore should be standard practice in every real estate sale for the buyer to ask the seller for a certification that he or she is a U.S. citizen or resident and for the buyer to do the withholding if it is not provided. It is possible for reduced withholding to occur if the foreign person obtains a withholding certificate from the IRS. 

 

Whether the failure to disclose that the seller if not a U.S. person would breach the contract depends on what the contract itself says. But I would suggest the buyer be ready to close on June 1, and be ready to do the withholding that the tax law requires if the seller cannot provide certification of being a U.S. citizen/resident. If the seller won't go through with closing because he/she doesn't like the withholding, well, that would likely be a breach of contract by the seller. 

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The contract states that the seller must inform the buyer in writing, this was never done, but then again, there seems to be no time frame for this to happen.  But I'm betting it can't be at closing, that would be crazy, what if the buyer didn't have the extra 10% of sale price.

 

I will call the IRS about FIRPTA tomorrow to see how the tax is to be sent, either the seller pays the tax at closing or there is no deal.  I find it ridiculous that a US buyer has to pay the tax for a foreign seller. 

 

Thanks for your input. 

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3 hours ago, DonnaCarole said:

But I'm betting it can't be at closing, that would be crazy, what if the buyer didn't have the extra 10% of sale price.

 

I will call the IRS about FIRPTA tomorrow to see how the tax is to be sent, either the seller pays the tax at closing or there is no deal.  I find it ridiculous that a US buyer has to pay the tax for a foreign seller. 

 

Thanks for your input. 

 

The idea is that the buyer takes deducts the money from the total he pays the seller. For example, if the purchase price is $250,000, instead of giving the buyer the whole $250,000, the buyer would pay the seller $225,000 at the closing and hold $25,000 to remit to the IRS. This way the buyer isn't paying anything more for the property; the buyer is still only paying $250,000. The only difference is in who gets the money. This is not any different than when your employer deducts tax from your paycheck to pay your income tax. Your employer isn't paying anything more doing that, but rather it is just sending part of your pay to the IRS instead of giving it directly to you. You only end up paying the tax if you fail to withhold it from what you give the seller. So what you don't want to do is give the foreign seller the whole purchase price (i.e. the whole $250,000) because then if the seller fails to pay the tax on the sale the IRS can came after you for the amount you were supposed to withhold (e.g. the $25,000). As for how this done, see the IRS page on reporting and paying the FIRPTA withholding. This page gives an overview of FIRPTA withholding rules. There is a link on that page called Reporting and Paying Tax on U.S. Real property Interests that tells you the forms needed, etc., with the links to the forms.

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