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What is FIRPTA?

HBI Tax 1

What is FIRPTA?

FIRPTA (Foreign Investment in Real Property Tax Act) is the IRS regulation that allows the US government to tax nonresidents on their sale of US real property interests (as well as exchanges, liquidation, and transfers of real property). Real property include parcels of land, personally used properties, short-term rentals, long-term rentals, and commercial properties.

Why is it Important?

The purpose of FIRPTA is to ensure that enough money remains in the US to cover any potential capital gains tax liability that may arise from the sale of the property. While the initial withholding is usually greater than what is actually owed, generality it is much easier to refund any overpayment to a nonresident, than it is to collect tax due later on.

What are the Requirements for FIRPTA?

The requirements for FIRPTA are relatively straightforward. 15% of the gross sale price is held back at closing. Typically the nonresident seller will then have two ways in which the withholding can be handled. 

The foreign seller can opt to send the funds directly to the IRS at closing. That is done by preparing an 8288/8288-A forms and requires that the full 15% withholding be sent to the IRS. This form must include information about the sale, such as the date of the closing, the amount realized on the sale, the amount withheld, and information about both the transferor (seller) and transferee (buyer). With this option, the seller will have to apply for a refund of any monies due to him by filing a US Income Tax Return for the year in which they sold the property.

The foreign seller, in most cases, can also opt to apply for a withholding certificate via the 8288-B application. In this scenario, the full 15% withholding is not sent to the IRS at closing.  Instead, it is held by a withholding agent (typically title, attorney, or CPA), and it remains there until the IRS completes their review of the 8288-B application and issues a withholding certificate. Currently the IRS is taking roughly one year to review the application and issue a withholding certificate. This certificate will direct the withholding agent on how to disburse the withholding.  If the application shows there is a loss on the sale, then the agent can release the full withholding back to the seller, and no funds go to the IRS.  If the application shows a gain on the sale, then the IRS will request a specific amount of withholding to be sent to them and the agent can refund the difference back to the seller.  The seller will still be required to file a US Income Tax Return to tie everything up and apply for any additional refund due to them.

Additionally, in order to obtain any portion of the FIRPTA withholding back, the foreign seller will need to have a valid US issued tax number that corresponds to their property ownership.  For example, if a property is owned personally then each owner will be required to have either a SSN or an ITIN.  HBI can assist with obtaining a US tax number as part of the FIRPTA process.

Our team provides expert assistance with FIRPTA and all related services needed to help insure a smooth real estate transaction. Visit https://hbitax.com/firpta for more information.


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