FIRPTA FAQs

FIRPTA FAQs

What is FIRPTA?

When a property is sold in the United States, there is potential for a tax liability on the gain from the sale.  If you're a U.S. Citizen or resident, you must file a tax return each year if you have a filing requirement. 

The IRS. recognized that because a foreign person doesn't have to file a tax return, there was no way to collect the potential taxes owed when a non-US Citizen sells a property.  To correct this problem, Congress passed  Foreign Investment in Real Property Tax Act, FIRPTA.  The Act requires a 10%  to 35% withholding on the sales price.  The buyer's responsibility is to collect the required withholdings and transmit it to the IRS.  It is also the buyer's responsibility to submit the proper documentation to indicate for whom the withholdings are collected.  It is then up to the seller to submit a U.S. return and the appropriate documentation to have the potential of receiving a refund.  If done properly, the whole process can take a year to two years to get a refund.  I have seen cases take up to a decade when the document was improperly filed!  This is why we create a service to prepare, file, and monitor FIRPTA withholding cases.

Who withholds the FIRPTA Deposit, the buyer or the seller?

Withholding the funds is required at the time of sale, and the payment must be remitted to the IRS within 20 days following closing.  In most cases, the buyer is responsible for ensuring the IRS receives its money within 20 days.

ARE TAX ID NUMBERS REALLY NECESSARY?

IRS regulations require all Buyers and foreign Sellers of U.S. real property interests are required to provide their names, addresses, and U.S. tax identification numbers on FIRPTA related tax returns, withholding certificates, and notices of non-recognition when disposing of a U.S. real property interest. While it’s not necessary to have the number prior to closing, every possible effort should be made to apply for a tax ID number, if any party does not have one. See Treasury Decision 9082 for more.  We highly encourage to avoid submitting the withholding remittance forms with just "pending" listed as the identification number.  This is a recipe for disaster.  We have worked cases that have taken up to 5 years to get the refund.

Who is subject to FIRPTA

The disposition of a U.S. real property interest by a foreign person (the transferor) is subject to the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) income tax withholding.  FIRPTA authorized the United States to tax foreign persons on dispositions of U.S. real property interests.

What is FIRPTA, and how do I avoid it?

When it comes to FIRPTA, every seller is considered foreign unless they can prove otherwise.  That's why it's a common and prudent practice for real estate sale agreements to include an affidavit under penalty of perjury stating that the seller is not a non-resident alien for purposes of U.S. income taxation.

What is a withholding certificate, and who can apply for one?

Under FIRPTA, the amount of tax required to be withheld can't be over the seller's maximum tax liability.  Many times, the maximum tax liability is a lot less than the required 15% withholding. When this happens, the IRS. can agree to an amount less than 15%.  This can be done by applying for a withholding certificate.  The Seller or the Buyer can apply for this certificate. This is usually done by submitting Form 8288-B.

HOW DOES A WITHHOLDING CERTIFICATE WORK EXACTLY?

Sellers can make an application for a withholding certificate if they expect to owe less than the standard required withholding. The application process is robust, as every detail must be supported with documents and paid receipts, and the application must be postmarked no later than the date of transfer. Withholding certificates can be applied for by the buyer or the seller, but typically, it’s the seller that makes application. When there is evidence that the application

What is the deadline for filing an application for reduced withholding?

The deadline is the day of the closing.

WHAT KIND OF PENALTIES ARE ASSESSED IF FUNDS ARE SUBMITTED LATE?

If funds are not remitted to the IRS in time, buyers can be assessed penalties that include but are not limited to failure to file, failure to pay, and interest that compounds daily.

When must the 15% withholding (or reduced withholding if applicable) be sent to the IRS.?

At closing, the 15% withholding is taken out of the proceeds due to the seller. The 15% withholding must be sent to the IRS within 20 days after closing if no reduction is applied for.  If an application has been filed to reduce the withholding, the 15% is withheld, but the funds are held in escrow until the IRS issues a withholding certificate.  The reduced withholding amount must be sent to the IRS within 20 days after the withholding certificate. This amount is sent to the IRS. using Forms 8288 and 8288-A.

What is the amount realized from the sale or other disposition of property?

The sum of the cash paid or to be paid (not including interest or original issue discount), the fair market value of other property transferred or to be
transferred, and the amount of any liability assumed by the transferee or to which the USRPI is subject immediately before and after the transfer. Generally, the amount realized for purposes of this withholding is the sales or contract price.

Can I apply for a reduction in taxes under Section 121- Exclusion of Gain from the Sale of Principal Residence as a Foreign Person??

Section 121 of the U.S. Internal Revenue Code allows for the exclusion of up to $250,000 ($500,000 for a married couple filing jointly) in gains arising from the sale of a "principal residence." The exclusion applies whether the residence is in the U.S. or a foreign country.

TO EXCLUDE GAIN ON THE DISPOSITION OF A HOME from income under I.R.C. section 121, a taxpayer must own and occupy the property as a principal residence for two of the five years immediately before the sale.  However, the ownership and occupancy need not be concurrent.  The law permits a maximum gain exclusion of $250,000 ($500,000 for certain married taxpayers).  The IRS. has issued proposed regulations to clarify how these rules work in certain situations.

A TAXPAYER IS CONSIDERED TO HAVE OWNED and used a home as a principal residence during the time their deceased spouse used the home as a principal residence.  This rule applies as long as the taxpayer's spouse is deceased and the taxpayer has not remarried on the day the home is sold.  Divorced spouses can also benefit from former spouses' ownership and use periods to satisfy the exclusion requirements.

TAXPAYERS MUST RECOGNIZE GAIN ON ANY portion of a residential property they don't use for residential purposes.  Any post-May 6, 1997 depreciation allowable on the property triggers recognition of otherwise excludable gain.

A TAXPAYER CAN GENERALLY CLAIM ONLY ONE exclusion every two years.  However, a taxpayer who disposes of more than one residence within two years or who otherwise fails to satisfy the requirements due to a job change or health problem may qualify for a reduced exclusion amount.

Who is exempt from FIRPTA?

Exemptions.  One of the most common exemptions to FIRPTA withholding is that the transferee is not required to withhold tax when the transferee (buyer) purchases real estate for use as their home and the purchase price is not more than $300,000.

How do you explain FIRPTA

FIRPTA is a tax law that imposes U.S. income tax on foreign persons selling U.S. real estate.  Under FIRPTA, if you buy U.S. real estate from a foreign person, you may be required to withhold 15% of the amount realized from the sale.  The amount realized is normally the purchase price.

What does FIRPTA mean in Real Estate?

The Foreign Investment in Real Property Transfer Act (FIRPTA) requires any buyer of a U.S. real property interest to withhold fifteen percent of the amount realized by a foreign seller.

Does FIRPTA apply to Americans?

Under the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA), a foreign person who disposes of a U.S. real property interest is subject to income tax withholding on the transaction.  FIRPTA gives the United States the authority to tax foreign persons on the disposition of U.S. real property interests.  U.S. citizens and resident aliens are not subject to FIRPTA

How do I get FIRPTA back?

This is the IRS.'s official process for obtaining an early refund of FIRPTA withholding. You can file Form 843 (Claim for Refund) and Form 8288-B to show the estimated tax on the sale. However, the IRS takes a long time to process these requests.

Can foreigners sell property in the U.S.A.?

Acquiring an ITIN number in the U.S.. is pretty easy. A foreigner selling property in the U.S. must apply for an ITIN number. The property owner will have to fill out a W-7 or W-7SP form to begin the process.  The buyer or an estate agent will demand an ITIN number upon selling the property.

WHAT IF THE SELLER IS NOT A FOREIGN PERSON?

Sellers that are not foreign, can complete a certification of non-foreign status, and provide it to the buyer prior to closing. The certificate must contain certain criteria for the buyer to be able to rely on it. Buyers that receive such a document, should retain a copy in their records for no less than 5 years. Withholding is not required when the seller is not foreign.

What if the Seller is a U.S. LLC?

Single-Member L.L.C.: A single-member US LLC is considered "disregarded" by the IRS for tax purposes.  If the seller is a single-member L.L.C., you have to look at that single-member.  If they're a "Foreign Person," then the FIRPTA withholding rules apply the same as if they were the seller themselves.

Multi-Member L.L.C.:  A US LLC with more than one owner is not considered "disregarded" and is taxed differently from single-member L.L.C.s.  The FIRPTA rules about withholding do NOT apply to multi-member U.S.. limited liability companies.

What if only some of the sellers are "Foreign Persons"?

Usually, withholding is required for each "Foreign Person" based on their percentage of ownership.  For example, if there are four joint-owners, each owning 25%, and 1 of the Sellers is a "Foreign Person," then the buyer only has to withhold 25% of the required withholding percentage.  If the Sellers own the property as a married couple, the IRS says each spouse owns 50%.  If only one spouse is a "Foreign Person," 50% of the required withholding would be required.

Are Tax Identification Numbers (ITIN/TIN) required for all parties?

The IRS requires all Buyers and Foreign Sellers of U.S. property to give their TINs, names, and addresses on all forms when selling a property.  It's best to have the TINs for all parties at the time of closing, but it is still possible to close without them if the following applies:

1. If the buyer doesn't have a TIN, they must send in the proper withholding forms within 20 days after closing.  The buyer will also need to send in a Form W-7 separately.
2. If the seller doesn't have a TIN, the buyer must send in the proper withholding forms within 20 days after closing and leave the Seller's TIN information blank.  The seller will have to get a TIN for the IRS to process the funds and follow up with the seller to make sure they do so.  Title Companies/Law Firms should let the seller know they will need to submit a separate application for a TIN by the closing.

Does FIRPTA apply to a personal residence?

Whenever a Foreign Person owns and wishes to sell property in the U.S., both residential and commercial, FIRPTA applies in almost all transactions.  The amount withheld isn't the tax itself but is a payment on the taxes that will ultimately be due from the seller.

What's the definition of a "United States Person"?

• a U.S. Citizen
• a resident alien who has a Green Card
• a resident alien who meets the Substantial Presence Test (see * below)
• a U.S.. corporation, partnership, or other legal entity (EXCEPT a "Disregarded Entity"-any single-owner domestic business entity, such as a single-member limited liability company)
• a Disregarded Entity, if the owner qualifies as a "United States Person" under what's stated above
• a foreign entity that has chosen to be treated as a domestic corporation

*The Substantial Presence Test – Under FIRPTA, a "Foreign Person" is considered a "U.S. Person" for the calendar year of a sale if they are present in the U.S.. for at least:

1. 31 days during the year of sale AND
2. 183 days during the 3-year period that includes the year of sale and the two years preceding the year of the sale, but only counting:
3. All days during the year of sale
4. 1/3 of the days during the first preceding year, AND
5. 1/6 of days during the second preceding year

When counting days, you can't include days that the Foreign Person is in the U.S. as a representative of a foreign government (example: a foreign diplomat), as a teacher, or as a student under a J, Q, F, or M visa, or as a professional athlete in a charitable sports event.

Does FIRPTA apply if the seller is in a short sale?

Yes, FIRPTA still applies.  Typically, it would be best to apply for a reduction in the withholding from the IRS.  A withholding certificate must be obtained before closing, or the closing agent must hold the 15% until it can be obtained or sent to the IRS within 20 days after closing.  Even though the IRS doesn't have to rush their process due to hardship, it is sometimes possible to get expedited processing during a short sale.

Does FIRPTA apply if the seller is in a short sale?

Yes, FIRPTA still applies. A withholding certificate must be obtained before closing, or the closing agent must hold the 15% until it can be obtained or sent to the IRS within 20 days after closing.  Even though the The IRS. doesn't have to rush their process due to a hardship, it is sometimes possible to get expedited processing during a short sale. Typically, it would be best to apply for a reduction in the withholding from the IRS.

Does FIRPTA apply if the seller is a Foreign Corporation?

FIRPTA applies if the company did not check the box to be taxed as a domestic corporation.  If they did decide to be taxed as a domestic corporation, it has to be documented in the transaction's file, and they must provide evidence of it on or before closing day.

WHAT ABOUT LLC’S FORMED IN THE US?

FIRPTA withholding may still be required even if the LLC is registered in the United States. It depends on how the entity is taxed. Limited liability companies with only one member, are usually considered disregarded entities. This means that the entity is disregarded for tax purposes, even though it is a legally recognized entity. Since the LLC is disregarded, we must look past the entity to see who the owner is. If the owner is one of the foreign person’s mentioned above, then the same FIRPTA rules apply. If the entity has multiple members, or if the entity has elected to be taxed as a corporation, then FIRPTA would not apply in this setting.

FIRPTA says that a Foreign Person selling a U.S. property has to have 15% of the "amount realized" withheld.  What is the "amount realized"?

Typically, when it comes to FIRPTA withholding, the "amount realized" is the sales price/ contract purchase price.

Is it possible for a Foreign Seller to have a social security number?

Foreign citizens doing business and earning income in the United States have taxpayer identification numbers (TINS).  These numbers may look like social security numbers. If the seller is foreign, they most likely won't have a social security number.

Does FIRPTA apply if the seller takes a loss when they sell their property?

FIRPTA doesn't automatically exempt a withholding from a Seller if they have a loss or zero gain on the sale of their property.  Consulting with a C.P.A. (we recommend Prithi Daswani, C.P.A.) about applying for a withholding certificate is the best thing to do and needs to be done early on in the transaction.

How does a Foreign Seller get their money back from the IRS if more money was withheld than what was owed?

The seller can consult with their C.P.A., and before closing, file an 8288-B Application for a Withholding Certificate to request a reduced amount or no withholding.  They can also file a tax return the following year to obtain any refund due.

The seller says they're a U.S. citizens, but they live in another country.  Does FIRPTA apply?

The current residency is not a good indicator of FIRPTA status because U.S. citizens might be living in other countries.

Does FIRPTA apply when the transaction is between a Foreign Seller and a Foreign Buyer?

The same FIRPTA rules apply, and both parties are required to have TINs.

Does FIRPTA apply if a Foreign Seller only own a portion of the property being sold?

The same FIRPTA rules apply, and the Foreign Seller will owe withholding on their % of their ownership of the property.

Is L.L.C. subject to FIRPTA?

If an L.L.C. owns the property owned 100% by a single owner/member, the FIRPTA rules will apply as normal.  But, if the L.L.C. is taxed as a partnership (which is the default treatment of an L.L.C. with more than one owner), then the FIRPTA rules will not apply, and no withholding is necessary.

Who is liable for withholding on the sale of property owned by a foreigner?

The law holds the buyer (called the transferee) responsible for withholding.

Is vacant land exempt from FIRPTA?

The FIRPTA exemption does not apply to vacant land, even if the buyer intends to build a residence on the property.  But there are some restrictions for the buyer.  The buyer must be an individual rather than a corporation, partnership, trust, or estate.

Who is actually responsible for withholding the money?

The Buyer and the Buyer's Real Estate Agent are actually responsible and liable for the withholdings.  The buyer typically has the Title Company handle the withholding for them.

How do I report FIRPTA withholding?

Form 8288.  The tax withheld on acquiring a U.S. real property interest from a foreign person is reported and paid using Form 8288.  Form 8288 also serves as the transmittal form for copies A and B of Form 8288-A, Statement of Withholding on Dispositions by Foreign Persons of U.S. Real Property Interests.

Why was FIRPTA created?

The Foreign Investment in Real Property Tax Act (FIRPTA) was enacted in 1980, initially as a response by Congress to concerns about increasing foreign ownership of farmland in the United States.

Is a resident alien exempt from FIRPTA withholding?

Subject to other additional requirements, an individual may qualify as a resident alien – and therefore not a "foreign person" under FIRPTA, if the individual was present within the United States for 31 consecutive days during the current year and 183 days during a three-year period that includes the current year and the two years immediately before that is considered a resident alien.  This is none as the substantial presence test

When foreigners sell U.S. property, the Foreign Investment in Real Property Tax Act FIRPTA may require what percentage to be withheld from the sale proceeds?

The IRS. requires 15% of the sales price be withheld on the sale of United States real property interests by foreign persons (on sales above $1,000,000), and either 15% or 10% on sales between $300,001 and $1,000,0000, and either 15% or $0 for sales of $300,000 and under.

Who signs the FIRPTA Non-foreign certificate?

To avoid issues with FIRPTA, the seller will sign an affidavit certifying that they are NOT classified as a “Foreign Seller.”

What is the difference between a U.S. person and a U.S. citizen?

Who is a U.S. Person?  Every United States Citizen.  You are liable for U.S. income taxes whether you are a citizen born in the United States or outside of the United States with at least one parent who is a U.S. Citizen.  If you are a naturalized citizen, you are also considered a U.S. Person.

Is a U.S. permanent resident considered a foreign person?

Lawful permanent residents (LPRs), also known as "green card" holders, are non-citizens who are lawfully authorized to live permanently within the United States and are NOT considered to be a “Foreign Seller.”

Is FIRPTA refundable?

When the certificate is received, the tax withheld is refunded to your client by the closing agent, in accordance with the instructions in the certificate - i.e., most, or all, of the FIRPTA withholding tax is refunded to your client.  This process can be completed in about three months.

What is the FIRPTA affidavit?

The FIRPTA affidavit is for all those sellers who are not foreigners.  This form certifies that the seller of the real estate property is non-foreign and/or a resident alien.  This form can help your seller in avoiding FIRPTA withholding.

What is U.S. real property?

The term U.S. Real Property interest means an interest in real property (including an interest in a mine, well, or other natural deposit) located in the United States or the U.S. Virgin Islands, as well as certain personal property that is associated with the use of the real property (such as farming machinery).

Do foreigners pay capital gains tax on U.S. real estate?

When a foreigner sells property in the U.S., they must pay capital gains taxes and possibly FIRTPA withholding tax.  The IRS. will withhold 15% of the gross purchase price of the property.

Can you get U.S. citizenship by buying a property?

One of the most common questions we get from our foreign clients is whether buying an American property will give them the legal right to live in the United States.  Unfortunately, our first answer is always no.  Just purchasing U.S. real estate does not automatically set you on the path toward citizenship.

Are domestic corporations subject to FIRPTA?

Foreign companies that elect to be treated as domestic companies are not subject to FIRPTA taxes and withholding when selling U.S. property.

Are Foreign C corporations subject to FIRPTA?

A foreign corporation that distributes a U.S. real property interest must withhold a tax equal to 21% of the gain it recognizes on the distribution to its shareholders.

What is a disregarded entity under FIRPTA?

A "Disregarded Entity" is any single-owner domestic business entity (such as a single-member limited liability company) other than a corporation unless it has elected to be treated as a domestic association for tax purposes.

Do you have to pay taxes on property sold abroad?

When you sell a property or real estate in the U.S., you need to report it, and you may end up owing a capital gains tax.  The same is true if you sell an overseas property.  The U.S. is one of only a few countries that taxes on worldwide income — and gains made from foreign property sales may also be considered foreign income.

Is FIRPTA a capital gains tax?

Capital Gains Tax is a U.S. Federal Tax that: Is payable on the net gain of your property to the IRS. Involves FIRPTA Withholding (15% of the gross sale price of the property). It can be deferred by using 1031 Exchange.

Does FIRPTA apply to sales under $300000?

The Internal Revenue Code (Code) provides the exemption to FIRPTA withholding titled "Residence where Amount Realized does not exceed $300,000".  This exemption from FIRPTA withholding is applicable if the transferee is acquiring the USRPI as a residence and the amount realized is $300,000 or less.

Who is responsible for FIRPTA?

The buyer

Who is a foreign person under FIRPTA?

A Foreign Person is a non-resident alien individual.  A foreign corporation that has not made an election under section 897(i) of the Internal Revenue Code to be treated as a domestic corporation is considered a foreign seller and foreign partnership, foreign trust, or foreign estate.  A foreign seller does not include a resident alien individual.

What does FIRPTA mean for a seller?

FIRPTA is a tax law that imposes U.S. income tax on foreign persons selling U.S. real estate.  Under FIRPTA, if you buy U.S. real estate from a foreign person, you may be required to withhold 15% of the amount realized from the sale.  The amount realized is normally the purchase price.

Does FIRPTA apply to rental income?

FIRPTA regulations pose significant costs to foreign investors in U.S. real estate.  For example, under FIRPTA, a foreign investor who holds U.S. real estate as a passive investment (i.e., with any type of net lease) must withhold 30 percent of the gross rental income, including expenses that net-lease tenants pay.

Is FIRPTA required?

The Foreign Investment in Real Property Transfer Act (FIRPTA) requires any buyer of a U.S. real property interest to withhold ten percent of the amount realized by a foreign seller.  26 U.S.C. § 1445(a).

How do I avoid FIRPTA withholding?

According to the IRS., you can be exempt from FIRPTA withholding if you meet one or more of the following:

1. Exception #1 - Buyer Will Reside and sign an affidavit
2. Exception #2 – Publicly Traded Corp.
3. Exception #3 – Corp Certifies that Interest is not U.S. Real Property. ...
4. Exception #4 – Seller Certifies They Are Not Foreign.

If a Foreign Person sells real estate at a loss and obtains a 0-withholding certificate, do they still have to file a U.S. tax return reporting the sale?

Yes, they do.  Just because they have the certificate doesn't mean they don't have to file.

A husband and wife are both on the title to real estate property in the U.S.  The husband is a foreign person, and the wife is a U.S. citizen.  They're selling the property for $500,000.  What is the withholding amount?

In this situation, the husband and wife each own 50% of the property for the 15% withholding purposes.  Therefore, the withholding would be $37,500 ($500,000 sales price X 50% to foreign spouse X 15% withholding rate).

Does FIRPTA apply to U.S. citizens living abroad?

The Foreign Investment in Real Property Tax Act (FIRPTA) of 1980 authorizes the United States to tax foreign persons who are non-resident aliens selling U.S. real property interests.  A U.S. real property interest includes sales of interests in parcels of real property.

Can a non-U.S. citizen sell property in the U.S.?

Non-US citizens can buy property since there is no citizenship requirement for real estate sales.  Foreigners can even qualify for a mortgage if they meet certain requirements.  However, foreign property owners face a more challenging tax situation than U.S. citizens.

Who is liable for withholding the sale of a property owned by a foreign seller?

The buyer’s responsibility is to withhold a FIRPTA deposit equal to 10% to 15% of the sale price in any sale or exchange of property owned by a foreigner (not a U.S. citizen).  The IRS. keeps this 10% to 15% to ensure that any capital gains on the sale are paid.  The buyer, buyer’s broker, and title agency share the liability for this withholding.

Why do I have to pay U.S. taxes if I live abroad?

You may wonder why U.S. citizens pay taxes on income earned abroad. Yes, U.S. citizens have to pay taxes on foreign income if they meet the filing thresholds, which are generally equivalent to the standard deduction for their filing status. U.S. taxes are based on citizenship, not the country of residence.

Do U.S. citizens have to report foreign income?

If you are a U.S. citizen or resident alien, you must report your worldwide income on your tax return.  This means that you must not only report income you receive from U.S. sources, but you must also report income you receive from foreign sources.

Do I have to pay taxes if I'm not a U.S. citizen?

If you're not a U.S. citizen, you might think you don't have to pay income taxes to the IRS. You'd be wrong. Non-citizens who spend enough time in the United States are subject to the same taxes as U.S. citizens.

Can you be a tax resident in two countries?

It is possible to be a resident for tax purposes in more than one country simultaneously.  This is known as a dual residence.

What is a FIRPTA withholding certificate?

A withholding certificate is an application for a reduced withholding based on the gain of a sale instead of the selling price.  If 15% of the selling price is more than the tax you will owe on this sale, then a withholding certificate may be ideal for you.

What does the IRS consider property?

Real property, also called real estate, is land and generally anything built on or attached to it.  If you buy real property, certain fees and other expenses become part of your cost basis in the property.

How is a home sale reported to the IRS?

Report the sale or exchange of your main home on Form 8949, Sale and Other Dispositions of Capital Assets. If you have a gain and do not qualify to exclude all of it, You have a gain and choose not to exclude it.  You will likely receive Form 1099-S.

Which property is exempt from FIRPTA?

The Internal Revenue Code (Code) provides the exemption to FIRPTA withholding titled "Residence where Amount Realized does not exceed $300,000".  This exemption from FIRPTA withholding is applicable if the transferee (buyer) is acquiring the USRPI as a residence and the amount realized is $300,000 or less.

Who fills out the FIRPTA forms?

In most cases, the buyer is responsible for ensuring the IRS receives its money within 20 days.  The buyer usually is the withholding agent and is ultimately responsible for sending the funds to the IRS and ensuring the form are properly completed.

How can I avoid capital gains tax on foreign property sales?

Generally, the only way to avoid recognizing gain is to reinvest the proceeds from a sale in like-kind property.  This would only apply to a business property sales

Do you have to pay taxes on property sold abroad?

When you sell a property or real estate in the U.S., you need to report it, and you may end up owing a capital gains tax.  The same is true if you sell an overseas property.  The U.S. is one of only a few countries that taxes you on worldwide income — and gains made from foreign property sales may also be considered foreign income.

Does FIRPTA apply to U.S. residents?

FIRPTA applies to all foreign persons, foreign corporations, and foreign partnerships selling or transferring property located within the United States.  FIRPTA does not consider resident aliens to be foreign persons.

How do I know if FIRPTA applies?

To answer this, there are a few questions to ask.  The first is to determine if the seller is a Foreign Person.  A Foreign person is defined as a non-resident individual, a foreign corporation that has not elected to be treated as a domestic corporation, a foreign trust, a foreign partnership, or a foreign estate.

The next set of questions relates to the purchase price and how the property will be used.

Will the buyer be residing in the property at least 50% of the year and be willing to sign an affidavit attesting to this at the closing?  If so, then the FIRPTA % will not need to be withheld if the property's purchase price is below $300,000.

If the purchase price is above $300,000, 10% to 15% should be withheld.

What does it mean "filed within a timely manner?"

The amount withheld must be submitted within 20 days following the day of closing.  Any required funds must be submitted within 20 days of the Withholding Certificate acceptance or denial notice if a Withholding Certificate was requested.

What does it mean when the funds are withheld?

Typically, this means that the title company takes the money from the sale proceeds and sends it to the IRS.  The seller has to file the right documents to get back what they should get back.  The problem with this is that because the seller is foreign, they have no Social Security Number and often do not have an ITIN.  So the money is literally just sent to the IRS in their name.  If it's a common name, it can take the better part of a decade to track it down.

If the foreigner does not have an ITIN, we will obtain one for them.

Often in a situation like this, the title company will transfer the funds to our trust account, where it is placed under the client's ID and name for distribution once the taxpayer receives an ITIN.  

What if the funds are not submitted on time?

Interest and penalties will be assessed beginning on the 21st day after the date of transfer and ending on the day the IRS receives the payment.  The IRS. will hold the buyer responsible for the interest and penalties if the buyer fails to withhold and make payment to the IRS.   If funds are not remitted to the IRS in time, buyers can be assessed penalties that include but are not limited to failure to file (5% (4.5% late filing and 0.5% late payment) for each month or part of a month that your return was late, up to 25), failure to pay (0.5% of the unpaid taxes for each month or part of a month the tax remains unpaid. The penalty won't exceed 25%), and interest (4.5%) that compounds daily

What are the exceptions to the 15% withholding?

Not a Foreign Person Exception:

The seller can provide the buyer with an affidavit stating they aren't a Foreign Person.  They also need to provide their name, social security #/taxpayer I.D. #, and address.

Personal Residence Exclusion: No withholding is required if the final purchase price is $300,000 or less, the buyer will reside in the property 50% of the time it is in use during each of the first two 12-month periods following the date of transfer, and they are will to sign the certification at closing

Reduced Rate of Withholding Exclusion: If the purchase price is $300,001 to $1,000,000 and the buyer has definite plans to reside in the property and will sign the certification at closing, the 15% can be reduced to 10%.  If the purchase price is over $1,000,000, the full 15% is required regardless of the buyer's occupancy declaration.

Withholding Certificate Exclusion: Sellers can also obtain a Withholding Certificate from the IRS., reducing or excluding the required withholding.

Personal Residence Exception:

Under the Personal Residence Exception, no withholding is required when:

1. The buyer is using the property as their residence
2. The sales price is $300,000 or less
3. The buyer decides to waive withholding.  (See additional requirements below)

Reduced Rate of Withholding:

Under this exception, a reduced withholding of 10% of the sales price is due when (1) the buyer is buying a property that will be used as their residence, (2) the sales price is greater than $300,000, but no more than $1,000,000, and (3) the buyer chooses to waive withholding.

To qualify for either the Personal Residence Exemption or the Reduced Rate of Withholding, the buyer (or someone in their family) has to have plans to live at the property for at least 50% of the time over two years following the closing date. If the buyer decides to use this exception, it should be done by an affidavit. If that doesn't happen, the buyer could become responsible to the IRS for the difference between the amount that was actually withheld and the amount that should have been withheld and interest and penalties.

Seller Obtains Withholding Certificate:

Sometimes, the seller has a withholding certificate from the IRS. that eliminates or reduces the withholding requirement.  If a Buyer chooses to rely on this exception, they should get a copy of the Withholding Certificate and hold it for at least five years.

Box checked for Foreign Corporation or Single-Member L.L.C.:

Domestic corporations are not subject to the withholding rules of FIRPTA.  Suppose a foreign corporation or single-member limited liability company that would normally be under FIRPTA checks the box on the form to be taxed as a domestic corporation. In that case, withholding won't be required.  The entity must file Form 8832 with the IRS., get IRS approval, and give the buyer evidence.  The buyer should keep a copy of this for at least five years.

If THE WITHHOLDING CERTIFICATE WAS FILED TIMELY, DUES THE BUYS STILL NEED TO WITHHOLD?

If the Withholding Certificate was mailed timely, Buyers still have to collect the appropriate amount (10% or 15% of the selling price) but they are not required to submit the funds to the IRS. Instead, the withholding amount can be retained in an escrow account until the certificate is approved or rejected. According to the instructions for the Form 8288-B, the IRS will usually act on these applications within 90 days. However, based on our experience with these types of applications, processing times are closer to 9-12 months due to Covid-19 delays.

How can I reduce the amount I owe?

This is where we shine.  We will look at what the seller paid for the property, what they are selling it for, and what they invested in improvements, and then determine what we can do to reduce the withholding.  We actually have a very high success rate at getting almost all withholding amounts back.  Of course, this depends on your situation and is done on a case-by-case basis, but we don't recommend doing it any other way.  More importantly, don't mistake using a title company that just sends the 15% to the IRS.  Especially if you do not have an ITIN.

How did I end up on your Company's website for FIRPTA?

When you're a foreigner selling your property, there are two parts to the equation – the C.P.A. firm handling your FIRPTA and your Title Company/Law Firm handling your real estate closing.  If they aren't on the same page and working together, the chances are high that you will end up fighting the IRS for a few years to get back your 15% withholding back.  Our attorneys, EAs, and CPAs work to reduce the withholding to the lowest level possible.  Then we will help the taxpayer file the proper U.S. tax return.  As part of your FIRPTA process, we will monitor the process by verifying both the deposit (to the correct account) and the acceptance of the return using an IRS Power of Attorney.  That way, the seller, buyer, buyer’s agent, and title company have peace of mind knowing everything has been properly processed.  Anything else is just a hope and pray process

What if I already have an Accountant/C.P.A.?

That's great, and we will work with anyone.  Just make sure they know FIRPTA and have a history of doing it. Less than 2% of all C.P.A.'s handle FIRPTA because it's a specialty. Over 90% of our clients who used a C.P.A. that doesn't specialize in FIRPTA end up making mistakes and hiring someone else later to track down the refund.  If this happens, you can expect a long, drawn-out process.  We have taken on cases that have taken the better part of a decade to resolve because the FIRPTA process was poorly handled.

What else will I have to do in the FIRPTA process?

You will be required to get an ITIN, which is a tax I.D.  This is so the funds you pay can be tied to you.  Otherwise, the IRS has no idea what account to apply the funds to.  This is something our team can do for you.

What does the FIRPTA CPA  and Legacy Tax & Resolution Services do regarding FIRPTA?

We can only speak to what Legacy Tax & Resolution Services does:

• Prepare ALL Required FIRPTA Forms, Affidavits, and Certificates
• Don't Pay Unnecessary IR.S.  Taxes, Penalties, or Interest
• Get Back Your FIRPTA Funds FASTER!
• Personalized Service Saves You Time, Money, and Frustration.  Yes, you actually get to speak to a real estate tax accountant.
• Online Technology Allows Us to Help You Anywhere In The World
• We Work With You During The Entire Process
• If Required, We Apply For Your ITIN Tax Id Number – All In One Place
• We Can Work With Your Current C.P.A. or Tax Accountant to Finish Your FIRPTA Withholding Certificate

How do you work with Foreign sellers?

The Legacy Tax & Resolution Services owner is originally from Germany, so we are familiar with all aspects of buying and selling real estate from abroad.  At Legacy Tax & Resolution Services:

1. Our Attorneys know the rules and regulations required for legal signatures on U.S. documents for every country in the world.  We work with you upfront to make the proper arrangements to get all legal documents signed.
2. Currency Conversion — We work with 3^rd party companies that beat EVERY major bank on currency conversions, so you don't get ripped off when you're selling your property.  You would be shocked at how many title companies/law firms don't know anything about this.
3. We speak your language (or we can get someone that can).  

CAN I STILL WORK WITH YOU IF I ALREADY HAVE AN ACCOUNTANT OR CPA?

Absolutely! We love to work with other tax professionals. We are very respectful of existing relationships and take these types of engagements seriously and we are happy to assist in any capacity.