Southwest Florida Title Insurance & Real Estate Blog

We get this question a lot. And we often get it laden with defensiveness from buyers’ real estate agents who are surprised by the demands of FIRPTA on their clients. Because FIRPTA is superficially understood as a tax on the seller, the surprise is understandable. So let’s discuss WHY this is an important issue for buyers and their agents to consider and HOW they can set expectations and prepare better for a deal that involves FIRPTA.

What is FIRPTA?

We have written extensively about FIRPTA on our webpage. “FIRPTA stands for the Foreign Investment in Real

FIRPTA navigation made simple.

Property Tax Act, which is found in Section 1445 of the IRS Code. In a nutshell, the Act provides that a transferee (i.e., buyer) of U.S. real property must withhold tax if the transferor (i.e., seller) is a foreign person. When FIRPTA applies, 10% of the gross sales price must be withheld and remitted to the IRS . . . .”

Why Should the Buyer Care about FIRPTA?

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A seller wrote to us recently and wondered the following:

“I paid the taxes from my escrow account for this year, how do I get my prorated money back? I paid my homeowner’s insurance through my escrow account, who handles cancelling the insurance and how do I do that? What will I need to provide to them showing proof that I no longer own the home?”

We’re sure she’s not the only one who wonders about these things, so let’s look at her situation and explain how the credits and reimbursements are likely to work at and after closing.

What is an escrow account?

Our client mentioned that she had paid taxes and insurance from her “escrow account.” She is referring to an escrow account which her mortgage lender required her to establish and fund so that the lender may ensure the payment of  lien- and risk-wielding items (like taxes and insurance!). Lenders often require borrowers to pay a monthly amount for “escrows” in addition to their principal and interest payment. The lender keeps those funds over the course of the loan and pays for the escrowed items from the escrow account when they become due.

In our customer’s case, her lender had paid both her taxes and insurance for the current year prior to the closing of her sale. For the sake of example, let’s say that her lender made these payments on November 15, 2014 (these would not normally be paid at the same time but we’re trying to keep it simple) and her closing was scheduled for December 1, 2014. At closing, she would have paid for an annual insurance policy through November 14, 2015 and for 2014 property taxes through December 31, 2014. So how does she get her money back since she won’t own the property after December 1?

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