Congratulations on your New Home Purchase…Oops! You’re liable for Seller’s Taxes!
As a buyer, no more rude shock can intrude on your new home celebration than finding out you are liable for Seller’s taxes. Understandably, by the time of your closing, you may have nearly depleted your bank account, paying the purchase price plus the myriad fees and charges for your new home. When the IRS comes calling soon afterwards, asking you to also pay Seller’s taxes, you can be excused for being very astonished. Yes, this can happen; this scenario is not as far-fetched as it may sound.
Under federal laws, 26 USC 1445 to be exact, the buyer of real estate is required to withhold at least 10% percent (increased to 15% as of February 15th) of the sale price towards IRS taxes owed by seller. If buyer fails to withhold this sum and the IRS is unable to collect its taxes from the seller, the buyer is not only liable to the IRS for the entire amount due, but also liable for the interest due on the sum (from when it became due until payment is actually made to the IRS). Many, if not most, purchasers of real estate are unaware of this rule and are all too happy to walk away from the closing with their new keys in exchange for payment to seller. Subsequent discovery by a buyer that she must pay seller’s taxes might sour the sweet taste of the new home purchase. Worse yet, perhaps, the lawyer who aided in the transaction may also be liable for the unpaid taxes, though only to the extent of the compensation he/she received from the closing.
Fortunately, as with many tax laws, this rule has a number of exemptions that can allow buyers to sleep better at night. The withholding rule is applicable only when the seller is a non-US person (e.g., a foreigner). To avoid trying to figure out whether a seller is a US taxpayer, a buyer would typically demand a non-foreigner affidavit (a FIRPTA Certificate), certifying such seller is a US person subject to US tax laws. However, if the subject property is acquired as a personal residence and the purchase price is less than $300,000, no withholding is required. Also, if the property is more than $300,000 but less than $1,000,000, the required withholding goes down to only 10% of the sales price.
Furthermore, if a seller provides a Withholding Certificate issued by the IRS, or if the property is acquired by the United States or a political subdivision thereof, a buyer is similarly not required to withhold from the sales proceeds.
Finally, if a seller provides a non-foreign certificate but the buyer knows the certification is false, the buyer may nonetheless be liable for the tax due on the sale. If you are considering purchasing a new home or recently bought a new home and wondering if you owe taxes, or you have any tax questions, contact the tax attorneys and CPAs at Thorgood Law Firm www.thorgoodlaw.com Call 212-490-0704 for a FREE consultation.
