Bless you! No, that’s not a sneeze, but having FIRPTA come into play during escrow can cause a big hiccup in your real estate transaction.

“What’s the big deal?” I actually heard a listing agent say recently in reference to a situation where the seller didn’t disclose that they are foreign sellers and the property listed was under contract. The ramifications of this omission could result in the buyer paying the seller’s withholding (taxes) after closing, if any are owed. Yes, you read that right. Hiccups to heartburn.

FIRPTA, also known as Foreign Investment in Real Property Tax Act, will become more and more prevalent in our market as eventually foreign buyers will become foreign sellers. Our sales contract addresses the requirements in section 15.2 of the sales agreement.

Big hiccups in real estate are not good. For sake of space I am only able to share tidbits of what to look for and what can happen, and touch on some of the exemptions to the withholding requirements. Three thoughts to consider include: a) the moving truck packed with your entire household will remain parked because closing is seriously delayed b) if you are a foreign seller a portion of your proceeds must be withheld at escrow until the IRS reviews all documentation, and c) buyers, defined by the IRS as “withholding agents” become responsible for payment. In some cases the payment can be up to 15 percent of the gross sales price.

Should discovery occur during escrow, there is a strong possibility that closing will be delayed. The seller needs to fill out Form 8288-B, Application for Withholding Certificate for Dispositions by Foreign Persons of U.S. Real Property Interests, W-7, as well as other applicable documentation for Escrow. Escrow is required to receive confirmation back from the IRS, which could take up to 90 days to review. It is a mind-numbing date and paper trail. My advice, and I am not a CPA nor attorney, is if either party to the transaction has questions about either party’s legal status, research and address it sooner than later. If the seller is a foreign person, he/she should first confer with their tax counsel or a CPA before entering into the real estate transaction.

So what about the buyer being held liable? The buyer may become responsible for payment if FIRPTA applies and escrow is not instructed to withhold the funds. This means that if a transaction closes and funds are distributed to the seller, who was legally a “foreign person,” the buyer may be on the hook. There are some instances in which attorneys and/or the real estate agents may become liable as well. There is language in the sales contract that clarifies that agents are not liable nor considered transfer agents; however, I continually read where anyone who assists in the transfer can also be held liable up to a certain amount.

A couple of FIRPTA exclusions are directly related to the purchase price. If it is less than $300,000 then it is exempt. Also, the property is to be used by buyer as a residence, and the buyer is an individual and not a foreign entity. That doesn’t sound too complicated yet let’s add some extras. What if the sale is over $300,000? If the purchase price of the property is over $300,000 but less than $1,000,000, the withholding requirement will be 15 percent of the purchase price if it will be occupied as a residence by a buyer who is an individual, or a member of the buyer’s family. The transferee must deduct and withhold a tax on the total amount realized by the foreign person on the disposition. The rate of withholding generally is 15 percent (10 percent for dispositions before Feb. 17, 2016).

There are local attorneys who specialize in this type of law. I strongly urge anyone who is assisting a foreign seller (or buyer) with the transfer of real property to consult with a qualified, knowledgeable attorney and/or CPA to help you navigate this law that went into effect before Reagan became President in 1981.

Yes Virginia, Bend — and Central Oregon as a whole — is now known world-wide for our quality of life, outdoor amenities as well as clean air and water. This is not something that may be coming our way, it is here now as there are foreign buyers and sellers investing in our beautiful state.