What is FIRPTA affidavit? Knowing this is extremely important. Therefore, we must find out what FIRPTA affidavit refers to. Abbreviation of ‘Foreign Investment in Real Property Tax act’, FIRPTA is used to gather taxes due on sale of property which non-tax paying foreign entities or individuals own. Either ten or fifteen of the gross sales price is what FIRPTA requires individuals buying real estate from a foreigner to withhold.

If you need help with your FIRPTA certificate please call us at 407-344-1012, or email us at info@freedomtaxfl.com.

Within twenty days after closing, the withheld percentage of the gross sales price must be deposited to the Internal Revenue Service. However, of late, FIRPTA has been modified a bit. The buyer needs to withhold fifteen percent of the gross sales price if a property bought from a foreigner is sold for more than $1 million.

According to FIRPTA, a foreigner is defined as a non-resident alien individual or a foreign entity, partnership or estate. Apart from understanding what FIRPTA affidavit refers to, it’s also important to find out the things that exempt an individual or entity from FIRPTA withholding. This is what we’re going to discuss next.

Exemptions of FIRPTA

Many situations warrant FIRPTA affidavit. However, before we discuss that, it’s important to take a look at the exemptions of FIRPTA. Several things make an individual or entity eligible for exemption from FIRPTA withholding. What are the exemptions of FIRPTA? Let’s find out.

FIRPTA does not require any withholding if:

  • The selling price of the property is not less than or equal to $300,000
  • A withholding certificate excusing the buyer from receiving the withholding
  • During of before closing, an affidavit stating that the buyer intends to use the property for personal purposes for a minimum of half of time for 2 years right after closing is signed by the buyer
  • Written proof of seller not being a foreigner

It is important for you to keep in mind that the aforementioned 50% calculation does not include the days the real estate is vacant. Vacant land is not counted even if the buyer intends to build an accommodation on the real estate. Also, it is important to keep in mind that this exemption is only for individual buyers and not for partnerships, corporations, estate, or trust.

Under perjury penalties, buyers require signing a FIRPTA affidavit that clearly states that they fulfill the requirements of the exemption. Furthermore, to report sale and make payments related to any incomes taxes due on the profit of the sale, sellers require filing United States income tax return even if they quality for the 10% withholding exemption.

FIRPTA clearly state that the total tax liability cannot be less than the required withholding tax amount. Therefore, buyers or sellers need to apply for a withholding certificate if they want to pay less than the 10% installment or withholding amount. IRS form 8288-B is the withholding certificate you may apply for. After receipt of application, the certificate is issued within 90 days. Apart from knowing what FIRPTA affidavit refers to, it is also important to find out the ways of applying for FIRPTA withholding certificate. We’re going to discuss this next.

Applying for a FIRPTA Withholding Certificate

FIRPTA affidavit is required for a number of situations. You’ll understand this better once you know all about applying for a FIRPTA withholding certificate. FIRPTA provisions clearly state that the maximum tax liability of the transferor is what the withholding tax amount cannot exceed. Often, the 10% required withholding is considerably higher than the maximum tax liability.

Due to the aforementioned circumstances, regulations are forced to make available a process that allows the IRS to agree to an amount lower than the 10% withholding required. You can acquire the lowered amount agreement by applying for a FIRPTA withholding certificate. Generally, to perform this process, you’ll need to submit an IRS form 8288-B. It is important that you fill out and complete the form with extreme care. You can apply for the withholding certificate if you’re either the buyer of the seller (transferee or the transferor).

It is extremely important to find out when FIRPTA affidavit is required. However, before we do that, we must know a few important things including the final date to apply for lowered withholding. Whether you’re the buyer or the seller, you need to apply to the IRS for lowered withholding before the date of closing. In case you’re unable to apply for lowered withholding by the date of closing, you’ll need to transfer the entire 10% to the IRS.

The time the IRS takes to process the lowered withholding applications is an important thing for buyers and sellers to know. First and foremost, you need to keep in mind that no fixed is assigned for the processing of withholding reduction applications. However, it usually takes 3 to 4 months for withholding reducing applications to be processed after submission. The timeline for transferring the 10% or lowered withholding to the IRS is another important thing to be aware of.

At closing, 10% withholding from the proceeds due to the person selling the property is withdrawn. If no request for lowering if withholding is made, the 10% withholding must be transferred to the IRS within 20 days after closing. However, if an application for lowering withholding is filed, the 10% is withheld. Though, the funds are maintained in escrow until the withholding certificate receipt is received from the IRS. You must the lowered withholding to the IRS within 20 days after you receive the withholding certificate. You can make withholding payments to the IRS using Forms 8288 and 8288-A.

You must know the situations or circumstances that necessitate FIRPTA affidavit. However, before finding that out, you must learn about whose responsibility is it to transfer the 10% withholding to the IRS. Generally, the buyer or transferee is responsible for transferring the amount due to the IRS at the right time. The closing agent will not be responsible for withholding payment as long as he or she is associated with the transaction in the following manner:

  • For document registration
  • For Exchange of documents between the parties
  • For obtaining title insurance reports
  • For obtaining reports that reveal the condition of the property
  • Performing clerical tasks such as typing or copying
  • For receiving and paying out consideration’s parts

Usually, supervising the transferring of the funds to the IRS is the responsibility of the buyer. This is inspite of the fact that the closing agent is the person responsible for actually transferring the funds.

Before we find out the situations that warrant FIRPTA affidavit, we need to know the foreign person’s role in the entire process. A question most non-resident foreigners ask is whether they need to report a U.S real estate sale by filing a United States income tax return even if they incur a loss and acquire a zero withholding certificate. The straightforward answer to this question would be a Yes!

The obtaining of a withholding certificate does not eliminate the need to report the transaction by filing a United States tax return. Another question that many foreigners ask is whether obtaining an ITIN is necessary for selling a United States real estate. Well, here is the answer: if you’re a foreigner, you can sell a United States real estate without an ITIN. Nonetheless, you’ll find applying for an ITIN advantageous if you’re a foreigner and are selling a U.S property.

Submitting form W-7 along with the necessary documents to the IRS is required by a foreigner to obtain an ITIN. Also, before applying for an ITIN, a foreigner must prove that they are requesting the ITIN for a genuine reason. The sale of United States property is a genuine reason to request for an ITIN. Before we finally discuss the situations that warrant a FIRPTA affidavit, we must take a look at a few important things.

Let’s start off with a question asked by many people: what is the way of determining the amount of withholding if a United States citizen and a foreigner, for e.g. husband and wife, are joint owners of a United States real estate? Okay, here comes the answer.

First of all, let’s suppose the property’s selling price is $800,000. Now, in case a United States citizen and a foreigner are joint owners of the United States real estate, the withholding will be the realized amount’s ten percent apportionable to the foreigner. For the 10% withholding purposes, the United States citizen and the foreigner are considered to own half of the property if no evidence of the above is available.

Now, since we considered the property’s selling price to be $80,000, the amount of withholding would be $40,000 ($800,000 selling price of the property×0.5 apportionable to the foreigner× 0.1 rate of withholding). Having looked at withholding certificate in detail, it’s time for us to move onto state withholding before we finally conclude with the situations that warrant FIRPTA affidavit.

If you need help with your FIRPTA certificate please call us at 407-344-1012, or email us at info@freedomtaxfl.com.

Understanding State Withholdings

The federal withholding requirements of FIRPTA and state withholdings are two separate things. Buyers are required by some states to withhold a supplementary amount to cover taxes that may be owed by sellers. States require this even if the person selling the property is a United States citizen residing in that state.

Here is an example of this. Whether or not the person selling the property is a California resident, the State of California necessitates buyers to withhold and transfer to California’s Franchise Tax Board 3.33%of the price the property sold for. Also, just like FIRPTA deposits, the person selling the property gets a refund if the tax amount withheld is more than the taxes owed.

Finally, the buyer must sign an affidavit that clearly states that the property’s purchase price is less than three hundred thousand dollars. Furthermore, it must mention that the buyer intends to live in the property. In case you choose against signing the form, withholding becomes necessary. Now that we’ve taken a good look at withholding certificate and state withholdings, it’s finally time to discuss the situations that warrant a FIRPTA affidavit.

Situations and Things that Warrant a FIRPTA Affidavit

What are the situations and things that warrant FIRPTA affidavit? When a foreigner sells a property in the United States, FIRPTA imposes income tax on it. The main reason of enacting FIRPTA was to minimize lost capital gain tax revenue from the sale of real estate by foreigners (individuals or entities).

What warrants FIRPTA affidavit? Even if a loss on sale is incurred, the IRS requires the buyer to withhold 10% of the gross sales price. In case the buyer does not withhold, he or she will be held legally responsible for the tax. A FIRPTA affidavit stating the seller isn’t a non-resident alien for United States income taxation purposes must be signed by the seller at closing. The main purpose of this affidavit is to safeguard the buyers.

Often, people find it difficult to ascertain who is a foreigner and what exceptions apply. The person selling the property must be either a United States citizen or a green-card holding resident alien if he or she desires to get exemption from FIRPTA withholding. So what warrants FIRPTA affidavit and what occurs when it’s made available? Once the person selling the property provides the buyer a completed affidavit, the buyer is no longer responsible for the withholding. However, the FIRPTA affidavit must clearly state that the person selling the property isn’t a foreigner.

What situations and things warrant FIRPTA affidavit? The most common FIRPTA exception is the person selling the property not being a foreigner. Such a situation requires the buyer to get an affidavit from the person selling the property that clearly mentions that the person selling the property isn’t a foreigner. Additionally, the FIRPTA affidavit must contain the name of the seller, his ITIN or SSN and United States address.

What warrants FIRPTA affidavit? If as a buyer you want to quality for either the personal residence exemption or the lowered withholding rate, you or your family must intend to reside at the property for personal purposes for a minimum of half of time for 2 years after closing.

Responsibilities of the Buyer and Seller

If the buyer is unable to meet the requirements of the tenancy, he or she may become liable to the IRS for the difference between the withheld amount and the amount which was to be withheld. It is important for you to keep in mind that the amount which was to be withheld includes interests and penalties.

Under the aforementioned exception, the buyer does not need to make this election even if the settlement agent informs him or her that neither the exemption nor the lowered rate automatically applies. Also, the buyer isn’t required to make the election even if the lowered rate or exemption isn’t supported by the facts.

What the buyer needs to do instead is make an election which helps to do the needful in case the buyer decides to apply for the exemption or the lowered rate. This election should be cast out as an affidavit by accrediting the buyer’s decision and if applicable, the facts that engage the buyer to the exemption or the lowered rate.

What warrants FIRPTA affidavit? The buyer is the party legally responsible to the IRS: this is no secret. However, this responsibility will transfer onto the settlement agent if the buyer does not document and handle the matter appropriately. The funds gathering and payment to the IRS creates this situation. Additionally, the file should showcase the specific written direction of the buyer if the withheld amount is more than 15% of the sale price of the property. Here is an example of this.

For settlement agents, acquiring an affidavit from the buyer that clearly mentions the buyer’s decisions as well as the facts that engage the buyer to the exemption or the lowered rate is important if the buyer decides to relinquish the withholding or withhold a lowered rate. Furthermore, the affidavit should clearly reveal that the buyer has won the right to obtain tax or legal advice.

So there you have it: the situations and things that warrant FIRPTA affidavit. The three situations that warrant FIRPTA affidavit is what we’ve looked at.

Final Word

Contrary to what most people believe, FIRPTA affidavit isn’t just a binding certificate. Whether you want approval for a lowered withholding rate or an exemption from withholding, FIRPTA affidavit can help you to get what you want. Additionally, it protects the buyer. Generally, FIRPTA affidavit includes the name of the seller, the SSN or ITIN of the seller and the United States address of the seller. If the seller is a company, the FIRPTA affidavit should reveal that the entity is not a foreign partnership, estate, corporation, or trust.

Apart from the aforementioned things, FIRPTA affidavit should include the name of the company, the United States EIN number of the company and the United States address of the company. Now that you’ve completely understood FIRPTA affidavit, you can decide whether or not you want/need it.

If you need help with your FIRPTA certificate please call us at 407-344-1012, or email us at info@freedomtaxfl.com.