Foreign real estate investments can be a complex field, particularly when it comes to U.S. tax regulations. One of the most important regulations for foreign property sellers is FIRPTA – the Foreign Investment in Real Property Tax Act. Buyers play a crucial role in this process, and it’s essential to understand your responsibilities as a buyer to ensure compliance and avoid any potential financial pitfalls.
The Role of Buyers in FIRPTA Compliance
As a buyer, you are integral to the FIRPTA process. Two main responsibilities fall on your shoulders:
- Ensuring Proper Withholding: The buyer must ensure that the FIRPTA withholding is correctly handled. This withholding acts as an advance payment on the capital gains tax owed by the foreign seller.
- Providing Necessary Information: FIRPTA withholding certificates, which might reduce or eliminate withholding, cannot be issued without complete information from both buyers and sellers. Your cooperation is therefore vital in gathering all the required details.
To prepare a successful FIRPTA application, gather the following information from buyers:
- Legal names of each buyer
- Physical address for buyers after closing
- U.S.-issued tax number for each buyer
Buyer Affidavits
A crucial part of the FIRPTA process involves buyer affidavits, which can affect the amount of withholding required:
- Sale Price < $300,000: If you are purchasing a property for less than $300,000 and intend to reside in it for more than 50 percent of the time over the next two years, you can sign an Intent to Reside Affidavit. This affidavit waives the requirement to hold FIRPTA withholding. We advise against signing this affidavit. By doing so, you potentially assume liability for the seller’s capital gains tax and 30 percent of all unreported rental income attributed to the seller. Thus, buyers are not protected under this option.
- Sale Price Between $300,000 and $1,000,000: If the sale price falls within this range and you intend to reside in the property for more than 50 percent of the time, signing the affidavit reduces the FIRPTA withholding from 15 percent to 10 percent, fulfilling your responsibilities and ensuring buyer protection.
The Role of Non-Residents and Tax Services
For non-residents making property purchases in the U.S., it is highly recommended to consult with an accountant on our team before moving forward. This consultation will help you understand your responsibilities as a non-resident property owner and allow you to plan accordingly.
Who Does FIRPTA Apply To?
FIRPTA applies to various entities, including:
- Non-Resident Individuals
- Foreign Trusts
- Foreign Estates
- Foreign Corporations
- LLCs owned by foreign owners (with some exceptions)
- Domestic Corporations owned by non-residents, subject to certain criteria
LLC Exceptions
When it comes to LLCs, a few exceptions might apply:
- Partnership Elect In: If an LLC has chosen to file tax returns as a partnership, the need for FIRPTA might be waived at closing. Under Section 1446(e) of the Internal Revenue Code, FIRPTA withholding may be handled outside of closing at the time the partnership return is filed.
- Corporate Elect In: If an LLC files tax returns as a corporation, FIRPTA is also waived.
Domestic Corporations Owned by Non-Residents
For domestic corporations owned by non-residents, FIRPTA is applicable if real estate is their primary business trade. In this scenario, the IRS requires that FIRPTA be handled at closing, as these corporations are considered real property holding companies.
Seek Expert Guidance
Navigating the FIRPTA process can be intricate and requires a solid understanding of the rules and responsibilities. Ensure compliance by reaching out to expert advisors. Harding Bell International is here to help you through every step of the process. For additional information or questions, don’t hesitate to contact us.
By understanding and fulfilling your responsibilities, you can make the FIRPTA process smoother and more manageable. Let Harding Bell International be your guide in navigating these complex regulations.
