Escrow & TitleIntermediateCalifornia Exam

What is the purpose of a 'FIRPTA withholding' in a real estate closing?

ATo withhold the agent's commission for tax purposes, consistent with standard title insurance practice

BTo withhold a portion of the sale proceeds when the seller is a foreign person, ensuring IRS collection of any capital gains tax owedCorrect

CTo withhold closing costs pending final lender approval, per customary closing procedure in California

DTo withhold HOA dues from the seller's proceeds, under standard California escrow and title practice

Why To withhold a portion of the sale proceeds when the seller is a foreign person, ensuring IRS collection of any capital gains tax owed Is Correct

Answer B: To withhold a portion of the sale proceeds when the seller is a foreign person, ensuring IRS collection of any capital gains tax owed

FIRPTA (Foreign Investment in Real Property Tax Act) requires buyers to withhold a percentage of the purchase price (typically 15%) from the proceeds of foreign sellers and remit it to the IRS. This ensures the IRS can collect taxes on any capital gains earned by non-U.

Exam Tip: Escrow & Title

Escrow questions test the neutral third-party role and the sequence of closing events. Remember that the escrow agent acts as a dual agent for both buyer and seller and cannot advocate for either side.

Key Escrow & Title Terms in This Question

Title Insurance

Insurance protecting against financial loss from defects in a property's title that existed before closing but were unknown at the time of purchase.

Escrow

A neutral third-party arrangement where funds, documents, and instructions are held until all conditions of a real estate transaction are satisfied.

Closing Costs

Fees and expenses paid by the buyer and/or seller at the closing of a real estate transaction, in addition to the property's purchase price.

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Key Terms to Know

Closing Costs

Fees and expenses paid by the buyer and/or seller at the closing of a real estate transaction, in addition to the property's purchase price.

Short Sale

A sale of real property where the sale proceeds are less than the outstanding mortgage balance, requiring lender approval.

1031 Exchange

A tax-deferred exchange allowing investors to sell one investment property and reinvest proceeds in a like-kind property while deferring capital gains taxes.

Easement

A non-possessory right to use another person's land for a specific purpose.