FIRPTA Withholding Escrow Agreement: A Complete Guide

When a foreigner sells their U.S. real estate property, a percentage of the sale proceeds is required to be withheld and remitted to the IRS. This requirement is referred to as Foreign Investment in Real Property Tax Act (FIRPTA) withholding. FIRPTA withholding is essentially an escrow, where the withholding agent is required to withhold the required amount from the sale price and remit it to the IRS.

Under FIRPTA, a buyer of U.S. real estate from a foreign seller must withhold 15% of the purchase price and remit it to the IRS. However, if the seller is able to obtain a withholding certificate from the IRS that reduces or eliminates the required withholding amount, the buyer can adjust the withholding amount accordingly.

To ensure that FIRPTA withholding is properly handled, it is recommended that a FIRPTA withholding escrow agreement be entered into between the buyer, seller, and the withholding agent. Below are some key terms that the FIRPTA withholding escrow agreement should include:

1. Parties: The FIRPTA withholding escrow agreement should clearly identify the parties involved in the agreement, including the buyer, seller, and withholding agent.

2. Property: The agreement should include a detailed description of the property being sold, including the address, legal description, and other pertinent details.

3. Purchase Price: The agreement should also state the purchase price of the property, and how much will be withheld for FIRPTA purposes.

4. Withholding Certificate: If the seller has obtained a withholding certificate from the IRS that reduces or eliminates the required withholding amount, the agreement should stipulate the amount of the reduction and the adjusted withholding amount.

5. Closing: The agreement should also outline the closing process, including the date, time, and location of the closing, and who will be responsible for preparing the necessary documents and paying any associated fees.

6. Dispute Resolution: In the event that any disputes arise between the parties, the agreement should include provisions for resolving those disputes, such as mediation or arbitration.

7. Representations and Warranties: The agreement should include representations and warranties from both the buyer and seller regarding their legal authority to enter into the agreement, as well as any other relevant information about the property.

A FIRPTA withholding escrow agreement is an important step in ensuring that FIRPTA withholding is properly handled when a foreign seller sells their U.S. real estate property. By including the key terms listed above, the parties involved can mitigate any potential disputes and ensure a smooth and successful transaction.