Selling property in the U.S. as a non-resident owner comes with specific tax responsibilities that must be meticulously followed. The Foreign Investment in Real Property Tax Act (FIRPTA) governs these transactions to ensure the proper withholding and payment of taxes on gains from the sale of U.S. real property held by foreign persons. Understanding these requirements is crucial for a smooth and compliant sale process.
Who is Responsible for FIRPTA?
FIRPTA was established in 1980 to ensure that taxes due on the gain from the sale (or disposition) of U.S. real property by foreign individuals or corporations are withheld at the source. It’s primarily the buyer’s responsibility to ensure that the seller pays any due taxes on the property. The buyer must execute the correct forms, provide the seller’s name, address, and tax identification number, and ensure that 15 percent of the gross sales price is withheld and submitted to the IRS.
If not properly handled, the buyer can be charged the withholding amount, which underscores the importance of understanding and complying with FIRPTA requirements.
How to Secure a Release of FIRPTA Withholding
You have two main options to obtain a release of FIRPTA withholding after the withholding and closing have already occurred.
Option 1: File U.S. Tax Returns Annually
File U.S. tax returns for each year rental income was received, reporting all income and expenses, and a final return reporting the sale to recover the balance of cleared funds. This process may take up to 18 months, depending on the timing of the sale within the tax year.
Option 2: File Form 8288-B
File Form 8288-B, “Application for Exemption from Withholding,” and supporting documents (including past tax returns) on or before the date of closing. The 15 percent withholding remains with the Closing Agent while the IRS processes the application and issues a Withholding Certificate for the cleared funds. This method typically takes about a year.
Essential Information Needed Before Closing
For a timely release of funds, it’s crucial to gather the following prior to closing:
- Buyers’ names, addresses, and SSNs (if U.S. citizens)
- Buyers’ names, addresses, and ITINs (if non-residents)
- If buyers are non-residents and do not have ITINs, the completed Form W-7 (one per buyer) with appropriate identification documentation.
Our firm liaises with realtors, title companies, and attorneys involved in the sale process to obtain this information on behalf of the seller.
Additional IRS Requirements
Even after receiving a Withholding Certificate, the seller must file a final U.S. income tax return to report the sale transaction. This filing may result in a further refund depending on current CGT rates, the number of owners, and the length of property ownership.
Contact Us for a Smooth Transaction
To ensure timely filing of your FIRPTA application and early release of withholding, contact us as soon as there is a contract for sale. Understanding and navigating FIRPTA can be complex, but Harding Bell International is here to help. Let us guide you through the regulations for a compliant and efficient property sale process.
