FIRPTA and Out-of-Country Sellers in Claremont Escrows

Most Claremont escrows never raise the question. But when a seller is not a United States person for tax purposes - or when the parties are not certain either way - a federal withholding regime commonly called FIRPTA enters the transaction, along with a separate California withholding requirement that applies far more broadly than most sellers expect.

Neither is exotic, neither is a penalty, and neither is anybody's judgment about a seller. Both are collection mechanisms: the law directs that a portion of the sale be withheld and remitted at closing rather than chased later. The trouble they cause in practice is almost never the withholding itself - it is discovering the requirement three days before recording. This article explains where the question sits in an escrow, who decides what, and why it belongs at the front of the calendar. It sits inside the escrow guide, and it is the clearest example in the whole cluster of a question that is genuinely legal and tax, not procedural.

What the requirement actually is

The Foreign Investment in Real Property Tax Act is a federal statute directing that, on a disposition of a US real property interest by a foreign person, an amount be withheld from the transaction and remitted to the Internal Revenue Service. The obligation sits on the BUYER as transferee, which is the structural fact people find most surprising - the buyer is the withholding agent, not the seller, and not escrow.

Escrow's role is administrative. The escrow holder typically collects the certifications, holds the withheld amount out of the seller's proceeds, and remits it with the required forms as an accommodation to the parties under their written instructions. That is a service, not a determination. THE ESCROW HOLDER DOES NOT DECIDE WHO IS A FOREIGN PERSON, does not decide whether an exemption applies, and cannot advise either side on the answer. It is a neutral executing instructions, exactly as the escrow officer guide describes.

California operates its own separate real property withholding regime administered by the state, and it is worth stating clearly because it catches people who assumed this was purely an international issue: the state requirement can apply to sellers who are perfectly ordinary US taxpayers but who are, for example, moving out of state. Exemptions exist and are claimed on state forms. The federal and state analyses are independent of each other, and a transaction can trigger one, both, or neither.

The specific rates, thresholds, exemptions, and certifications are set by statute and regulation and they change. This article deliberately states none of them, because a stale figure in a real estate article is worse than no figure at all. Get the current numbers from a tax professional or the agencies themselves.

Why it has to be handled early

A withholding requirement discovered late is expensive in exactly one currency: days. The certifications have to be obtained and signed. A seller wishing to claim a reduced rate or an exemption may need to apply for a determination, which is its own process on its own timeline. A seller without a US taxpayer identification number may need to obtain one, which is a separate application entirely. None of these is difficult; all of them take real calendar time that a closing date does not automatically contain.

The disciplined approach is simply to ask the question when escrow opens, alongside every other item with a third-party lead time - the logic the opening-week guide applies to inspections, title, and insurance. Escrow will normally circulate certification forms as a matter of routine. Complete them promptly and truthfully, and where the answer is anything other than obvious, get a tax professional involved before the form is signed rather than after.

For a seller, the practical consequence to plan around is cash. Withholding reduces the proceeds DISBURSED AT CLOSING, and any refund of over-withheld amounts comes later through the tax filing process. A seller who has planned a subsequent purchase against gross proceeds - the concurrent closing that the double-escrow structure depends on - can find the arithmetic short at exactly the wrong moment.

For buyers, and for both sides

Buyers should understand that the federal obligation rests on them as transferee. In practice escrow handles the mechanics, but the responsibility is not something the buyer can simply assume was taken care of. It is worth confirming in writing that the certifications were obtained and that the withholding was handled - and keeping that documentation with the settlement statement and the recorded deed.

Both sides benefit from a single discipline: route these questions to the right professional immediately rather than crowd-sourcing them. Whether a person or entity is a foreign person for these purposes, whether an exemption applies, how a trust or an estate or a partnership is treated, and what the current thresholds are - these are questions for a tax professional or an attorney, not for an agent and not for an escrow officer. Escrow can tell you what it has received and what it will do under the instructions; it cannot and should not tell you which box to check.

And because this article is about money leaving a closing in an unusual pattern, the standing rule applies with extra force: verify every wiring instruction by telephone at a number you obtained independently, never one printed in an email, and treat any late change to payment details as fraud until you have confirmed it by voice.

Handled at the start, withholding is a form, a calculation, and a line on the settlement statement. Handled at the end, it is the reason a Claremont closing moved. The difference is entirely a matter of when the question was asked.

This is general information, not legal or tax advice, and it deliberately omits current rates and thresholds because they change. Consult a qualified tax professional or attorney about your own transaction.

Anthony Grynchal has been licensed in California since November 2009.