FIRPTA

Description

What is FIRPTA?

FIRPTA (Foreign Investment in Real Property Tax Act) is a federal withholding tax applied to non-residents who sell their real estate in the U.S. When the property is sold, the closing agent withholds 15% of the sale price and sends it to the IRS (Internal Revenue Service). Later, when you file your tax return, the IRS will determine if the withheld amount was sufficient. If it was too low, you will need to pay the difference when filing your return. Otherwise, the IRS will issue a refund for any excess withholding.

When Does FIRPTA Apply?

FIRPTA applies when:

• The property is owned by a non-resident,
• The sale price exceeds $300,000,
• The buyer will not be living in the property.

How to Reduce or Avoid FIRPTA Withholding?

• Exemption: If the property is sold for less than $300,000 and the buyer uses it as their primary residence, FIRPTA withholding can be avoided.
• Reduced withholding rates: When the sale price is greater than $300,000 but less than $1,000,000, and the buyer is an individual who will use the property as their primary residence, the withholding rate is 10%
• Withholding certificate: The FIRPTA withholding can be reduced or even eliminated if the seller applies to the IRS for a Withholding Certificate for Dispositions by Foreign Persons of U.S. Real Property Interests using Form 8288-B. The process takes around 90 days, and during this period (between the sale date and the issuance of the certificate), the 15% FIRPTA withholding is held by the transaction’s closing agent. This allows for the withheld amount to be partially or fully refunded in advance.
• Using a U.S. Corporation: FIRPTA does not apply when the seller is a U.S. corporation (as long as it’s not a foreign corporation – a foreign-owned corporation), even if the corporation is owned by foreign individuals. In this case, the foreign owner would still be subject to U.S. tax when selling shares of the corporation, but the withholding rules under FIRPTA would not apply directly to the sale of the real estate.
• Using a Domestic Partnership: If the foreigner sells their interest in the partnership rather than the real property itself, the FIRPTA withholding may not apply directly to the sale of the partnership interest (though capital gains taxes might still be owed).

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