Buying or Selling With an International Client? Don’t Miss This.

By Linda Welsh

Specialize in representing savvy Buyers and Sellers for residential, second home, vacation properties, lake and hill country properties, new and existing homes, land and lots. Relocation services include area, community and neighborhood expertise and helping the entire family to find the perfect home to meet their needs and wish list.

Austin is a wonderfully diverse, international city, and that means a lot of real estate here involves someone who lives abroad, either buying a home or selling one they already own. There’s one part of these transactions that catches people completely off guard and can cost them enormous amounts of money if it’s handled wrong. The good part is that when you know about it ahead of time, it’s very manageable. So here’s what everyone on both sides of these deals should understand.

Our market draws people from all over the world, and I love that. But when one side of a transaction is what the tax law calls a foreign person, a federal rule comes into play that most people have never heard of until they’re at the closing table. It’s called FIRPTA. And the thing I really want you to hear is this: it is not a reason to avoid these transactions, not even close. It’s simply something that has to be handled correctly, with the right professionals involved. I’ve watched clients who planned ahead sail right through it, and I’ve watched people who didn’t know the rules get hit with an expensive, avoidable surprise. The goal is to make sure you’re in that first group.

First, what FIRPTA actually is. FIRPTA stands for the Foreign Investment in Real Property Tax Act. In plain English: when a foreign person sells a home in the United States, the government requires that a large portion of the sale price, generally fifteen percent of the total sale, not the profit, be withheld and sent to the IRS at closing. And it’s calculated on the whole sale amount, even if the seller barely made a profit. That withheld money isn’t necessarily gone for good, it’s essentially a prepayment against taxes that may be owed, and in many cases the seller can later file to recover a portion if too much was withheld, and there are reduced rates in certain situations. But you can see why it’s such a shock if no one warned you. Fifteen percent of an entire sale price is an enormous amount to suddenly have held back.

Second, and this is crucial if you’re the buyer: the responsibility falls on you. Under this rule, it’s the buyer who must make sure that money is withheld and sent to the IRS, not the seller. So if you’re purchasing from a foreign seller and the withholding isn’t handled properly, the IRS can come after you, the buyer, for the amount, plus penalties. Many buyers have no idea they’re taking on that responsibility. This is exactly why you need experienced people around the transaction: an agent who flags it early, and the right title company, attorney, or tax professional to handle the withholding correctly so you’re protected. Handled properly, it’s completely routine. It only becomes a nightmare when nobody knew to deal with it.

Third, plan ahead, because the smartest moves happen long before you sell. If you own property here from abroad, how you handle it over the years can make a massive difference in what you owe when you sell. I’ve seen owners who worked with the right team from the beginning: they rented the property out, kept clean records, and paid their taxes properly along the way, and because of that, when it came time to sell they had options available, including tools that let you defer taxes, that saved them a great deal. And I’ve seen the opposite, owners who didn’t know the rules and handed over a large, painful sum they could have largely avoided. The difference wasn’t luck; it was having knowledgeable people guiding them from the start. This is very manageable, but only if you get the right advice early.

An international transaction, whether you’re buying from someone abroad or you own property here and live elsewhere, is absolutely something to feel good about. These are wonderful opportunities. They just require someone who knows the rules and surrounds you with the right professionals, the attorneys, accountants, and title people who handle this correctly.

So if you’re buying from an international seller, or you own a home here and live abroad, please talk to me early, before you’re at the closing table. Call or text me at 512-657-4033, email me at linda@lindawelshrealty.com, or visit blog.lindawelshrealty.com, and let’s put the right team around you and make the whole thing smooth.