What Is FIRPTA?
If a foreign person/entity is selling a US real property interest, the transaction could be subject to the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) income tax withholding. FIRPTA was enacted to ensure that foreign investors are taxed on the gains and applies to both residential and commercial real estate transactions.
When FIRPTA applies, the buyer (whether domestic or foreign) is actually responsible for withholding ten (10%) percent of the amount realized from the sale (i.e. the entire purchase price, not just the gain). The buyer is considered the withholding agent, and if the buyer does not withhold the appropriate amount, the buyer will be held liable for the tax and any penalties associated.
Who is considered a foreign person or entity? he IRS defines a foreign person as a nonresident alien individual, a foreign corporation that has not made an election under section 897(i) of the Internal Revenue Code to be treated as a domestic corporation, a foreign partnership, a foreign trust, or a foreign estate.
What Are The Exceptions To FIRPTA Tax Withholding?
The buyer is obligated to withhold ten (10%) percent of the amount realized unless:
- If a U.S. residence is sold for $300,000.00 or less and the buyer intends to occupy the property for residential purposes (although not necessarily the buyer’s principal residence), the sale is exempt from FIRPTA withholding. For purposes of clarification this exception will apply even if the Buyer only uses the property for 30 days a year, provided he does not intend to rent for more than 30 days; or
- The seller presents the buyer with a bona fide withholding certificate from the IRS which reduces or eliminates the FIRPTA tax withholding obligation; or
- The seller gives the buyer a Non-Foreign Affidavit certifying, under penalties of perjury, that the seller is not a foreign person. The affidavit must contain the seller’s name, U.S. taxpayer identification number, and home address (or office address, in the case of an entity); or
- The amount the seller realizes on the transfer of a U.S. real property interest is zero.
What Is A FIRPTA Tax Withholding Certificate?
In certain situations, a seller may apply to the IRS for a withholding certificate which will reduce or eliminate the withholding requirement. The application for a FIRPTA withholding certificate must be mailed into the IRS before the date of sale. Generally, the seller will apply for a certificate if the ten (10%) percent withholding payment exceeds the seller’s maximum tax liability, as is often the case considering the withholding requirement is applied to the gross proceeds amount.
When Is The FIRPTA Withholding Payment Due To The IRS?
As per the requirements of the IRS, the buyer of real estate subject to FIRPTA is required to report the purchase/sale to the IRS via IRS Forms 8288 and 8288-A. The ten (10%) percent withholding amount is due no later than the twentieth day after the sale.
Every real estate transaction is unique and comes with its own set of issues. To better understand whether FIRPTA applies to your transaction, please call our office at (305) 712-7979.