How FIRPTA works when you are buying a property from foreign seller

If you are looking for a vacation home there is a chance that you will be buying a property from a foreign seller, because a lot of homes in Florida are owned by Canadians and nonresidents. In this case as a buyer you will need to withhold from 10-20% of purchase price and forward it to IRS. That’s how IRS collects withholding taxes from nonresidents who are not paying taxes on regular basis.

So why do you need to know about withholding taxes if seller pays it? As a buyer you can use this withholding taxes as a leverage because it is a lot of money that seller will not receive at the closing.  The amount of this money will depend on your intent of the use of the property and on the price that you offer.

Let’s say you are buying a property for $500,000 in this case you will have to withhold 15% of the purchase price, it would be $75,000 that you will have to withhold from the seller and forward to IRS. Now if you are going to use this property as your personal residence then another taxes will apply and it will reduce the amount of withholding taxes from $75,000 to $50,000.

There are cases when you will not have to do any withholding and sometimes sellers just don’t want to pay anything extra. If you are buying a property under $300K and you will use it as your primary residence. You will need to sign an affidavit and based on the affirmation on that affidavit, the seller won’t need to pay any withholding taxes.

Now I just want to clarify, if it is a vacation home that you are buying using it as a personal residence does not mean that you have to live there for entire two years.

You will sign an affidavit where it says” of the intended time that you are going to use a property for you and your loved ones, close personal family, you have to use it at least half the time that you put in the affidavit. So in the first two years you if you are going to use the property for 100 days you will need to use it for at least 51 days.  What you won’t be able to do is to rent it for the first two years.

So your intent of the use of the property is going to make a difference and if you have a realtor who will know how to take it into account and use it as a negotiation toll they would be able to get you a better price.