FIRPTA 101

FIRPTA 101

WHAT IS FIRPTA?

FIRPTA is the acronym for Foreign Investment Real Property Tax Act.  This Act was established in 1980 to authorize the United States to tax foreign persons on “dispositions” of U.S. real property interests.  Dispositions being a sale or exchange, liquidation, redemption, gift or transfer.

WHEN DOES FIRPTA APPLY?  HOW MUCH IS IT?

When a Non-Resident Foreigner sales real estate – then Firpta withholding will apply.

If the Sale Price is from $1.00 to $1,000,000.00 and the Buyer is NOT going to be living at the property as their Primary Residence, the withholding amount is 10% of the purchase price.  If the Sales Price is $300,000.00 or under, and the property will be Buyer’s Primary residence – then NO WITHHOLDING is required provided the Buyer executes a FIRPTA Certification that the property falls under these parameters.

If the Sale Price is greater than $1,000,000.00, the withholding is 15% of the purchase price.  If the Buyer plans that the property will be their primary residence for the next 24 months, then withholding is at 10% of the purchase price.

WHO IS RESPONSIBLE FOR WITHHOLDING FUNDS DUE TO THE IRS?

Many would answer the Escrow Holder or the Title Company, however, it is the Buyer.  The thought process behind this is that the Foreign Non-Resident Seller, currently not a U.S. Taxpayer, will be long gone after the sale of the real estate.  However, the Buyer will still be here.  After all, the Buyer owns real estate in the U.S., and most likely is a U.S. Resident and taxpayer. 

IF THE SELLER IS A NON-RESIDENT FOREIGNER…..

The Non-Resident, Foreign Seller will need to obtain an Individual Tax Identification Number (ITIN) by submitting a form W7 to the IRS if this has not already been obtained.  This process can take up to 8 weeks or more.  A Tax return using this ITIN number will need to be filed if seller is intitled to any refund.

THINGS TO KEEP IN MIND:

• If the Seller has a Social Security Number issued that begins with a 9, He/She is NOT a permanent resident or U.S. National.  This Seller is a Non-Resident Foreigner and is subject to FIRPTA withholding.
• The IRS will look at a married couple as two different individuals.  If one spouse is a Foreigner and the other is a U.S. Resident, all the FIRPTA requirements and tax will apply to that Foreign Spouse for their portion of ownership.
• New regulations for the application of the ITIN requires the Foreign Applicant to submit their ORIGINAL passport with the supplication, or they must get a “Certified” copy of it.  A “Certified Copy” can only be obtained from special Certified Acceptance Agents at the IRS or elsewhere, and not all IRS locations have the agent.
• Withholding applies even if the Foreign Seller is claiming a loss or zero gain on investment.  If seller does not have enough to cover the 10% or 15% of purchase price, due, then seller will have to deposit int Escrow the shortage.
• Withholding applies in Short Sale transactions.
• The Foreign Seller can submit to the IRS a request for a reduced withholding by submitting a form 8288-B.  this process can take months, so it needs to be started early, or, it may be faster to just file Tax Return with the ITIN number.