Escrow Company Required to Transfer to IRS 15% of Sales Proceeds of Real Property Sold by a Non-U.S. Citizen

Question: We are Mexican citizens who sold a 20-acre parcel of land in Buckeye for $3,000,000. At close of escrow, the escrow company transferred 15% of the sales proceeds, i.e., $450,000, to the Internal Revenue Service (“IRS”). The escrow company said that the reason for this transfer to the IRS is that we may have to pay capital gains taxes on the $3,000,000 sale of the 20-acre parcel. Is that correct?

Answer: Yes. Under the Foreign Investment in Real Property Tax Act (“FIRPTA”), an escrow company is required to withhold and transfer to the IRS a certain percentage of the sales proceeds of most real property sold by a non-U.S. citizen. If the non-U.S. citizen then files a tax return with the IRS that shows no capital gains tax is owed, the IRS will send the non-U.S. citizen a refund of the percentage of the sales proceeds paid by the non-U.S. citizen.

Note: Under FIRPTA any real property that sells for more than $1,000,000, the withholding is 15%. For real property that sells for more than $300,000 but less than $1,000,000, the withholding is 10%. For real property that sells for $300,000 or less, there is no withholding.

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