IMPORTANT NOTE: As with any tax related matter, we strongly suggest consulting with a tax expert
What is FIRPTA?
FIRPTA stands for Foreign Investment in Real Property Tax Act, which was adopted in 1980. It deals with real estate transactions where the seller is a foreign person. FIRPTA authorized the United States to tax foreign persons on dispositions of U.S. real property interests.
How are sellers impacted by FIRPTA is they are a foreign person?
Unless the seller qualifies for a very narrowly defined exemption, the Seller must have 15% of their sales proceeds withheld. The withheld amount is required to be forwarded to the IRS, by the Closing Agent, within 20 days of the date of closing. These funds are held until the IRS is satisfied that all taxes due by the non-resident are paid.
Is there an impact to buyers if the seller is a foreign person?
Buyers who have heard of FIRPTA may be surprised to learn that a liability is created for the buyer by the law. FIRPTA places the burden of collecting the tax on the transferee/buyer on a transaction. If withholding is not calculated and remitted properly by the seller, in which case the liability can be assessed against the buyer. The buyer must execute or have executed the correct forms including the sellers name, address and social security number or individual taxpayer identification number.
If the payment is not made by the buyer, the IRS can seize the real property (or other assets of the buyer). Request a copy of the withholding certificate from the closing agent and, if withholding was calculated, request a copy of forms 8288, 8288-A and front and back of cancelled check. Retain these documents in a safe place along with your settlement statement and other closing documents.
What constitutes a foreign person for purposes of FIRPTA?
The test of whether FIRPTA withholding is required or not, is a statement made by the seller under penalty of perjury that they are not a non-resident alien for purposes of U.S. income taxation.
Which transactions are EXEMPTED and how are EXEMPTIONS determined?
Transactions where the sales price is less than $300,000 and the Buyer attests that the Buyer or a member of Buyer’s family has definite plans to reside at the Property for at least 50% of the number of days the Property is used by any person in each of the first two 12-month periods immediately following the closing. The buyer must agree to sign an affidavit stating that the purchase price is under $300,000 and the buyer intends to occupy. The buyer is not legally required to do this and may choose not to sign the form, in which case withholding must be done.
What RATES apply to these transactions?
The typical withholding rate in most situations is15% of the total purchase price, but may in certain situations be reduced to 10%. An application for a reduced withholding will need to be prepared in advance of closing. If the application can be filed prior to closing, and certificate for a reduced withholding procured prior to then, amount of funds withheld at closing can be reduced.
Can't the real estate professional or escrow person help with FIRPTA questions?
Escrow and real estate professional may have experience and knowledge of FIRPTA, but are not qualified or permitted to provide advice on individual tax payer situations.
For more information on FIRPTA visit https://www.irs.gov/individuals/international-taxpayers/firpta-withholding
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