When a foreign person sells real property in the U.S., additional tax withholding is required under the Foreign Investment in Real Property Tax Act, FIRPTA. The buyer’s responsible that the correct amount is withheld, interestingly enough. The rational holding the buyer responsible is that the U.S. can seize the property if the proper amount is not withheld. They put it on the buyer.
There’s an exception for a transfer of a buyers personal residence, allowing an exemption up to $300,000 then a reduced rate of up to $1,000,000 before the full 15% must be withheld. The exemption applies only to personal residences, and all of the real property 15% must be withheld. So, catch that the exemption is for the transferee, the buyers personal residence, so if you’re selling to someone who’s buying a residence, you can be exempt up to $300,000 before the full 15% would be withheld.
How do we know if someone is a foreign person and additional tax withholding applies? Closing agents and the buyers may rely on a non-foreign status affidavit or certification. Having the person attest under penalty of perjury that they are a non U.S. resident for purposes of income taxes. The bottom line in the closing, your closing attorney, they should be asking the seller if they’re a U.S. citizen.