FIRPTA? I know, that sounds like you should say excuse me after you say this out loud. Perhaps you have never heard of FIRTPA or perhaps you have but haven't a clue what it is or how it could possible relate to real estate. FIRPTA stands for The Foreign Investor Real Property Tax Act (FIRPTA) and requires non-residents to pay a 15% withholding tax on the sale of any U.S. Real Property Interest. Even if you are not a Foreign Investor you should be aware of what this is because it could impact you if you the person on the other side of a sale or purchase is.
It is more obvious why this topic is important to be educated on if you are a non-US individual who owns or plans to own property in the US. But, why should you pay attention to this if you ARE a US resident. Because the point of FIRPTA is to make sure the non-resident files a return, and pay any tax due on the disposition of a real property interest. If you are the buyer of a property that is owned by someone who is subject to FIRPTA and the tax amount is not collected at closing, the responsibility will fall to you as the new property owner. The duty for tax collection is on the Buyer to deduct, withhold, report, and remit payment to the IRS and the Buyer is legally liable for the withholding tax if the code is not strictly followed. The government can also record a lien. Civil and criminal penalties are possible.
Prospective property buyers who are not US residents should pay special close attention to this article so that you can be informed and plan accordingly. Section 1445 of the IRS tax code requires foreign persons to pay US Income tax on the gains from selling US Real Estate. The law simply recognizes the difficulty of collecting money from someone overseas, so they collect it at Closing.
The amount withheld is based on the gross sales price of the property (15% of gross sales price). The withheld amount is credited on the subsequent tax return filed by the non-resident alien (as defined in the Internal Revenue Code). This includes but is not limited to, in most cases, a sale or exchange, liquidation, redemption, gift, transfers, etc. In other words, if you sell your property you are subject to this code section.
There are some ways that a seller who is a Non-US owner to reduce that 15% withholding if they proactively take steps and qualify. The Seller can request that a smaller amount be withheld using IRS Form 8288-B. The non-resident has to demonstrate that the 15% withholding exceeds any actual tax due. For example, if the non-resident bought the property years ago for $400,000, and now has a sales contract for $390,000, they should be successful in eliminating the withholding tax by following the proper steps. Proactively retaining an experienced tax advisor can help in this process ahead of time so not to delay closing.
If the sales price is $300,000 or less, the tax can be eliminated if the Buyer is willing to sign an affidavit - the Buyer must swear it’s his intention to occupy the property (cannot intend to lease or rent it out more than 50% of total occupancy) for the next two years. Subsequent events (loss of a job) can change his use of the property without penalty. Of course, proper documentation is important. This is a gross oversimplification of the law. For more information please contact me, as I have a Masters of Laws Taxation (LLM) from the University of Miami.
If the amount realized exceeds $300,000 but does not exceed $1,000,000, the amount withheld can drop from 15% to 10% if the property is intended to be used as a residence (as discussed in the prior paragraph).
If the sales price exceeds $1,000,000, then the withholding tax is 15%. No affidavit can reduce the 15% amount. The Seller receives credit for this amount when he files his return. The goal is to have each non-resident file a return, and pay whatever he owes. He may be entitled to a refund, or if the gain is large, he may owe more.
Your agent should always check to see if the property of interest is subject to FIRTPA and consult and attorney if needed. The closing company should also be made aware of this so that proper withholding.
Here is a link to a FIRPTA calculator that one of the local CPA firms that specializes in FIRPTA provides.
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