The Foreign Investment in Real Property Tax Act (FIRPTA) withholdings during real estate transactions can be difficult to navigate. The process involves many regulations, rules, and special documents. While it’s not advisable to enter into a FIRPTA transaction without professional assistance, we’ve answered the top five questions about FIRPTA to get you started.
What is FIRPTA?
When a property is sold in the U.S., there can be a tax liability on the gain from the sale. United States law requires that all persons, whether foreign or domestic, pay income tax on U.S. real estate property interests. However, foreign investors do not file a tax return each year. In order to correct this issue, Congress passed the Foreign Investment in Real Property Tax Act. It requires withholding on the sales price in anticipation of the taxes that will be due from the foreign seller on the transaction.
Who does FIRPTA apply to?
FIRPTA applies to all “foreign persons.” You are considered a foreign person if you are a non-resident individual, or a foreign corporation, partnership, estate, or trust. FIRPTA defines a foreign person by outlining who is not a “United States Person.” A United States Person is a U.S. citizen, a resident alien with a green card or who meets the substantial presence test, or a domestic corporation, partnership, or single-owner business entity.
Who is exempt from FIRPTA?
If the real estate is purchased for use as a personal residence and the purchase price is not more than $300,000, the buyer is not required to withhold taxes.
What are the withholding requirements?
At least 15 percent of the gross purchase price of the property is withheld at the time of sale, and the payment must be remitted to the IRS within 20 days after closing. This, along with any necessary documentation, is the buyer’s responsibility.
What is a withholding certificate?
According to FIRPTA, the amount of tax required to be withheld can’t exceed the seller’s maximum tax liability. Typically, the tax liability is far less than the required 15 percent withholding. With a withholding certificate, the IRS can agree to an amount less than the standard withholding amount. The seller or buyer can apply for this certificate by submitting Form 8288-B.
We specialize in U.S. real estate transactions involving foreign investors. Our expertise ensures full FIRPTA compliance with U.S. tax laws. Learn more at https://hbitax.com/firpta.