Understanding FIRPTA (Foreign Investment in Real Property Tax Act) is crucial for both foreign sellers and buyers involved in U.S. real estate transactions.

The following blog post serves as a comprehensive guide to navigating FIRPTA and its implications.

FIRPTA, enacted in 1980, mandates a withholding tax on foreign persons selling or exchanging U.S. real property interests. This withholding ensures the IRS collects potential capital gains taxes from foreign sellers.

Check out our short video for the key details.

What is the definition of “Foreign Person” Under FIRPTA?

    • A “Foreign Person” includes non-resident alien individuals, foreign corporations, partnerships, trusts, or estates.
    • Resident alien individuals are excluded.

What are the Withholding Rates and Requirements?

  • The standard withholding rate is 15% of the gross sales price.
  • For properties sold between $300,001 and $1 million, with the buyer intending to use it as a personal residence, the withholding rate reduces to 10%.
  • Withholding must be remitted to the IRS within 20 days after the transfer date.

What are the exceptions?

    1. Property acquisition for personal use and sales price under $300,000.
    2. Seller certification of non-foreign status under penalty of perjury.
    3. Seller obtaining a withholding certificate from the IRS.
    4. Seller providing a notice of non-recognition.
    5. Realization of zero proceeds from the disposition.

Why should Buyers care?

The responsibility for withholding and remitting the required amount to the IRS lies with Buyer or Buyer’s agents.

What can Sellers do?

  • A seller can apply for a withholding certificate using Form 8288-B, reducing or eliminating withholding requirements. This process typically takes 90 days.
  • Sellers may provide a notice stating no recognition of gain or loss is required, based on IRC provisions or U.S. tax treaties.
    • Buyers must file a copy with the IRS and are personally liable under FIRPTA.
    • If a withholding certificate application is pending at transfer, withholding is required, but payment is deferred until the IRS issues a certificate or denial notice.

What impact does FIRPTA have on 1031 Exchanges?

  • Proceeds used to pay FIRPTA withholding are not considered necessary for the exchange, potentially resulting in taxable consequences for sellers.
  • Bringing cash to cover withholding at closing can help avoid this issue.

KEY TAKEAWAY:

Have a Seller who is foreign?  Contact us now!

Navigating FIRPTA requires careful attention to detail and adherence to IRS regulations. By understanding FIRPTA‘s requirements and exceptions, Melrose Title Company can help you with the intricacies of your transaction to ensure compliance and mitigate potential tax liabilities.