What is FIRPTA?
FIRPTA stands for the Foreign Investment in Real Property Tax Act of 1980. Contrary to popular belief, this act is not a tax at all, it’s a withholding. Just as the title implies, this withholding was designed to ensure that foreign owners of US property pay their share of taxes on the profits (or gain) when they sell.
Who is responsible for the withholding?
FIRPTA rules require that a buyer withhold 15% of the gross purchase price of the property at the time of closing when they buy US real property from a foreign person
Who is considered a foreign person?
You are considered a foreign person if you, the “Seller” of US real estate, are a:
Non-resident alien individual
Foreign corporation that has not made an election to be treated as a domestic corporation
Foreign trust, or foreign estate
*A resident alien, electing to be treated as a US resident, is NOT considered a foreign person according to FIRPTA
What if the buyer determines the seller is not a foreign person?
The seller can complete a Certification of Non-Foreign Status. The buyer will retain this certification for their records. Withholding is not required for this type of transaction.
What if the buyer determines the seller is a foreign person?
The buyer should withhold 15% of the gross purchase price unless an exception applies and the withholding can be reduced. All funds must be submitted in a timely manner.
What is considered a timely manner?
The amount withheld must be submitted within 20 days following the day the closing took place. If a withholding certificate was applied for, any required funds must be submitted within 20 days of the withholding certificate notice.
What if the funds are not submitted on time?
Interest and penalties will be assessed beginning on the 21st day after the date of transfer and ending on the day the payment is received by the IRS. These fees are payable by the Buyer.
Are there exceptions to the 15%?
No withholding is required if the final purchase price is $300,000 or less and the buyer (or their family members) will reside in the property 50% of the time it is in use during each of the first two 12-month periods following the date of transfer. If the purchase price is $300,001 to $1,000,000 and the buyer has definite plans to reside in the property, the 15% can be reduced to 10%. If the purchase prices is over $1,000,000, the full 15% is required regardless of the buyer's occupancy declaration. Sellers can also obtain a withholding certificate from the IRS, reducing or excluding the required withholding. Contact us for additional exeptions that may apply.
How does a withholding certificate work?
According to FIRPTA rules, the amount of tax required to be withheld cannot exceed the maximum tax liability of the seller. Often times, the actual tax liability is far less than the required 15%. Upon receipt of the withholding certificate, the IRS can agree to an amount less than the standard withholding amount.
Who can apply for the withholding certificate?
Either the seller or the buyer may apply for the withholding certificate.
Who should you call? I recommend a local company: Firpta Solutions, Inc. What does FIRPTA Solutions do?
FIRPTA Solutions, Inc. has a team of professionals dedicated to these types of transactions. They guide you through the maze of FIRPTA, expertly assisting you with all of the required forms, affidavits, and certificates. They are skilled at submitting the paperwork for a reduced or excluded withholding amount.
What else do I need to know?
Effective November 4, 2003, all buyers and foreign sellers of U.S. real property interests are required to provide their names, addresses, and US tax identification numbers on withholding tax returns, applications for withholding certificates, and notices of non-recognition, or elections under sections IRC 897(i) when disposing of a U.S. real property interest.
What if I don’t have a US tax ID?
According to FIRPTA rules, both parties to the sale are required to have a US tax ID. FIRPTA Solutions can help you or your client apply for such an ID.