FIRPTA and the Short Sale

An interesting issue arose on a closing we had recently with regards to FIRPTA and short sale. FIRPTA is a capital gains tax on foreign nationals who sell their homes. Those that qualify for the FIRPTA withholding are selling an investment property or selling their home for more than $300,000. The withholding is 10% which is forwarded to the IRS and then reimbursed back to the seller after a potential withholding.

FIRPTA gets tricky in the short sale. A short sale can only be approved if the seller is making no money on the sale. However, if there is additional money being held that would eventually be reimbursed back to the seller, the lender won't approve it (because the seller would eventaully get the withholding back). The lender won't deal with the withholding because they don't want the extra work in getting additional money back. So who sends the withholding to the IRS? In the closing we handled, the realtor fronted her commission in place of the withholding. This is risky on two fronts. First, the realtor could wait up to a year to get the money back and, secondly, they may not get all their money back.

Always, keep this in mind where helping a distressed borrower out with a short sale. If they are a foreign national, there may be nothing you can do.