DISCLOSURE: The information gathered here is deemed reliable as of the date of publication. For the most updated information, visit the Internal Revenue Service website and consult a tax expert.
If you are a foreign person selling real property in the United States, it is important to understand the implications of the FIRPTA statute and consult with a tax professional before entering into a sales contract. FIRPTA withholding may lead to funds being withheld from your proceeds for the IRS. Although the settlement company will likely handle most of the filing and submission to the IRS after closing, it is important that you understand this law since the buyer is ultimately responsible for seller compliance.
What is FIRPTA?
FIRPTA, or the Foreign Investment in Real Property Tax Act, is the 1980 tax law that requires foreign investors of a U.S. property to pay taxes to the Internal Revenue Service (IRS) on any capital they gain from the sale of that property. Contrary to what you may assume, the BUYER is the party who is actually responsible for making sure the seller pays the tax, or buyer faces the consequence of owing the tax personally.
According to the IRS, the definition of a foreign person is the following:
“A Foreign Person is a nonresident alien individual, foreign corporation that has not made an election under section 897(i) of the Internal Revenue Code to be treated as a domestic corporation, foreign partnership, foreign trust, or foreign estate. It does not include a resident alien individual.”
In other words, a non-foreign seller is a U.S. citizen or resident with a green card. Foreign corporations have different requirements and tax rates, but this article will focus on individual buyers and sellers.
The FIRPTA Tax Act dictates the following tax withholding guidelines:
|STATUS OF THE SELLER||PROPERTY SALE PRICE||BUYER’S TAX WITHHOLDING BASED ON SALES PRICE|
|U.S. Citizen or Legal Resident||Exempt*|
|A Foreign Person||up to $1,000,000||10%|
|A Foreign Person||More than $1,000,000||15%|
*Exemptions are explained later in this article. Even with exemptions, buyers must take steps to prove they are exempt.
If the foreign seller owns a percentage of the property, then the FIRPTA withholding applies to the percentage the foreign seller owns.
Since the burden of compliance is on the buyer, the settlement company administers the appropriate deduction from seller proceeds based on the sales price. Until the tax is paid in full, the government obtains a security interest in the property, which means failure to comply could result in the seizure of the property and other assets.
Form 8288 reports the FIRPTA tax to the IRS, and it must be submitted along with the full tax amount within 20 days of closing. The form requires the Tax Identification Numbers (TINs) of both the seller and the buyer, which some foreign persons do not have. If that is the case, then those without social security numbers or TINs must fill out the W-7 form.
Summary of FIRPTA Forms
|FORM||DESCRIPTION||WHEN IT’S REQUIRED|
|W-7||Individual Tax Identification Number (ITIN) Application||If both the buyer and seller are foreign persons, each party is required to have an ITIN before the transaction can take place.|
|Form 8288||Withholding Tax for Property Sale by Foreign Person||Buyer fills out to certify the amount to be withheld, which must be submitted along with Form 8288-A.|
|Forms 8288-A and 8288-B||Statements of Withholding on Sales by Foreign Persons||Must be filled out for each foreign seller involved in the transaction and applies for withholding exemptions.|
|Form 1099 Copy B||Proceeds from Real Estate Transactions||Reports the sale of the property to the IRS.|
In many real estate transactions, FIRPTA exemptions apply to the sale, meaning the buyer is not required to withhold the full tax amount. If an exemption applies, the buyer’s settlement agent or attorney will file a signed affidavit and apply for a Withholding Certificate. A Withholding Certificate is typically issued by the IRS within 90 days of receipt, which is why the application must be filed before or by the closing date. The deadline for Form 8288 then becomes 20 business days after the issue date of the Withholding Certificate or the date of denial. If the buyer paid more in taxes than the final withholding amount, he or she can be reimbursed during the following tax year.
Exemptions for foreign sellers include:
The seller is not a foreign person - in which case, a FIRPTA affidavit with the seller’s social security number and US address are required.
The sale price of the property is less than $300,000 and the buyer or a family member lives in the property for at least 50% of the time within the first two years of the date of transfer-waiver from buyer required by Smart.
The property is part of a 1031 exchange in which both properties are in the U.S., no cash is exchanged, and no mortgage boot applies.
The seller recognizes no gains or losses on the transaction.
A Withholding Certificate is issued to the seller.
For guidance on the amount that needs to be paid and the forms that are required after closing, speak to a CPA or tax expert.