Are you dealing in real estate property? If yes, then you may be pondering over how to avoid FIRPTA withholding? This question may come to the mind of the buyers who are interested to buy a real estate property from a foreign owner. Since the foreign sellers of the real estate property are not the residents of the United States, therefore they have to pay off the taxes from the gain of sale price. Additionally, those who find an interesting property sold by foreign sellers should also understand about FIRPTA. This is why they are questioning how to avoid FIRPTA withholding.

Buying real estate property is really common in the United States nowadays. But when it comes to buying real estate property from a foreign seller, it can become really costly. This is why people are looking for ways to know how to avoid FIRPTA withholding. The FIRPTA withholding certificate or form 8288 can help you in omitting the withheld amount by the Internal Revenue Service. If you want to know about how to avoid FIRPTA withholding, read this blog to find out all about it in detail.

If you need any help completing all IRS FIRPTA Withholding Certificate, please call us at 407-344-1012, or email us at info@freedomtaxfl.com.

Overview to FIRPTA and FIRPTA Withholding

Before understanding how to avoid FIRPTA withholding, it is necessary to understand the basics of FIRPTA and FIRPTA withholding. There are several foreigners who are dealing with real estate properties in the United States. The residential sellers are taxed from their income while there was not any system to obtain the taxes from the foreign sellers previously, thus FIRPTA originated. FIRPTA is the abbreviated form of Foreign Investment in Real Property Tax Act. Before 1980, there was as such no law in the United States to obtain taxes from the foreign sellers.

During 1980s, FIRPTA law was introduced under the PATH Act to charge the taxes on real estate properties in specific, from all the foreign sellers. There was no way to collect taxes before this. Additionally, the foreign sellers did not use to sell the real estate properties exponentially. In the late 1980s, the selling of real estate properties was on the rife and hence the IRS introduced FIRPTA withholding. FIRPTA law indicates that when a buyer purchases a real estate property from a foreigner, the foreigner is liable to pay 15% of the taxes on the purchase price on the gain of sale.

Additionally, the amount will be withheld by the Internal Revenue Service. Initially, the law charges 10% taxes on the gain of sale. But after the amendments under the PATH Act, the law has raised the percentage by 5%. The withholding rate has now become 15% for the foreign sellers. No matter whom the buyer is dealing with, an individual foreigner, settlement officers, purchaser’s agent, etc, 15% of the amount will be withheld by the IRS. In some cases, the buyer also becomes the withholding agent. This depends upon the mutual understanding of both the parties. If the foreign seller wants to pay the taxes themselves, they can do so.

However, often some foreign sellers leave it to the buyer, making them liable to pay the taxes to the IRS from the gain of sale. When buyers become the withholding agent, they hold 15% of the taxes amount from the total purchase price of the real estate property and send it to the Internal Revenue Service.

Understand Who is Actually a Foreign Seller

Understanding the basics of FIRPTA may have given you an idea regarding FIRPTA. We will be explaining the entire procedure to answer how to avoid FIRPTA withholding, but for that you first need to understand whether or not you are dealing with a foreign seller. Foreign seller is an individual who is not the resident of the United States under the Internal Revenue Code. They are the ones who do not have a Green Card. They are also called as non-resident aliens in the United States. In addition to Green Card, foreign individuals are the ones who also do not have one the main types of tax ID number, SSN. This number is only given to those who are locals of the United States. The two basic parameters to see whether or not the seller or individual is a foreigner is to see if they have a Green Card and SSN number.

Ways to Determine If Your Transaction is Really Subjected to FIRPTA Withholding

The core aim of FIRPTA is to secure taxes from a foreign seller. Now that you know who is a foreign seller, you should also understand whether or not your transaction is subjected to FIRPTA withholding. There are certain ways that we want to elaborate to help you in understanding if your transaction is subjected to FIRPTA withholding. This is the pre-requisite step before we understand how to avoid FIRPTA withholding.

So, all those who are interested to know how to avoid FIRPTA withholding, can explore the pre-requisite ways to determine if their transaction is eligible for FIRPTA withholding or not. Here are the main factors.

·       The Status of the Real Estate Seller

Buying a real estate property from a foreign seller may also put the buyer in trouble if they become a withholding agent. They will have to submit 15% of the purchase price to the Internal Revenue Service. When you are buying a real estate property, you may not know who you are dealing with. In order to save yourself from FIRPTA withholding, the first thing that you should consider is the status of the real estate seller.

The first thing you should keep in mind in order to know if they are foreign sellers is to check if they have a Green Card. Another most important aspect is the tax ID number. If they can show you an SSN number and a Green Card, this means that they are foreign sellers. On the contrary, if you see that the seller is trying to hide their identity or giving you justifications, you can consider it as a red flag for faking their status.

·       Show the Tax ID Number

No matter if the individual is a non-resident or a resident; tax ID numbers are given to everyone in the United States. These numbers are necessary to be given to the individuals or companies to fulfill the taxation purpose. There are three types of tax ID numbers, the Individual Taxpayer Identification Number (ITIN), Social Security Number (SSN) and Employer Identification Number (EIN). Each tax ID number is provided to the individual depending on their status.

The seller you are dealing with should also have an SSN number if they are residential buyers. If the sellers have this number and the green card, they will not be liable for FIRPTA withholding, not making you worried about how to avoid FIRPTA withholding.

·       Consider the Purchase Price

Once you have identified about the status of the seller, another aspect that can help determining the eligibility is the purchase price. According to the Internal Revenue Service, if the purchase price of the real estate property is more than $300,000 and the seller is a foreign person, then withholding of taxes become necessary.

The purchase price is also an exemption that limits FIRPTA withholding. In case the sale price of the real estate property is not more than the mentioned amount, then the foreign seller will not have to pay for the taxes. Additionally, this kind of purchase price of real estate property is treated as primary residence under the Internal Revenue Code.

·       See the Form of Corporation

In addition to the mentioned elements, another most important aspect that can help you determine about FIRPTA withholding eligibility is the form of corporation you are dealing with. There are two forms of real estate properties in corporations, domestic or foreign. The foreign seller will be liable to pay the taxes when the disposition of an interest is in a foreign corporation. Therefore, first determine the form of corporation and you will be able to know if you are liable for the taxes or not.

·       Consider the Exemptions

Exemptions are the set of elements for transmitting taxes of FIRPTA set by the Internal Revenue Service (IRS). Basically, these are limitations that exempt the foreign seller from FIRPTA withholding. All those who are asking how to avoid FIRPTA withholding should go through the exemptions too. If you fall under any of the exemptions, you will likely not be liable for the FIRPTA taxes. Here is a brief overview of the exemptions.

  • When the sale price is less than $300,000
  • When the real estate property is a foreign corporation
  • If the transferor gives you penalties
  • When IRS gives you withholding certificate with excuses
  • If the corporation is not a United States Real Property Holding Company
  • When the seller provides a legal notice from the IRS
  • If the property is partnership or with a publicly traded trust
  • When the US property is zero

·       False Residential License

At times, some foreign sellers try to fool the innocent buyers showing them false or incorrect residential license or any other document proving them the resident of the United States. Internal Revenue Service (IRS) takes strict action towards such kind of transaction. As a buyer, if this happens to you, you should directly report it to the IRS or any other authority and they will take strict action against it. However, many buyers are not able to distinguish a fake license from a real one. This is where you local lawyer can help you. They are well-versed and have sound knowledge about everything, and they will check the certification and license properly and ensure if it is genuine.

If they do not find it authentic, they will alert you. Additionally, there are chances that the seller may also be selling an illegal property, which should also be checked by the lawyer. This is a big crime and IRS can take strict criminal action against the culprit.

If you need any help completing all IRS FIRPTA Withholding Certificate, please call us at 407-344-1012, or email us at info@freedomtaxfl.com.

How to Avoid FIRPTA Withholding?

After considering the above mentioned aspects, we hope you will be able to understand whether or not you are subjected to FIRPTA withholding. Now that you know about it, it will become easier for you to understand how to avoid FIRPTA withholding. If you want to explore the core of how to avoid FIRPTA withholding, check out the steps and ways below to transmit the amount of FIRPTA withholding.

·       Form 8288

We did give an introduction in the very beginning about Form 8288. Basically, the FIRPTA law determines that the buyers who dealt with the foreign sellers pay 10% of the taxes on the sale price. But after the amendments in the FIRPTA law, the form has been revised and there has been an increase in the percentage for 5%. Now the buyers will have to pay 15% tax as an obligation. It also focuses on new set of rules and regulations as per the Section 1445 (A).

Additionally, the revised Form 8288 also provides details about the limitations and exemptions. When you fill up the details in the Form 8288, you either avoid some of the amount or transmit the entire amount. Ensure that you fill up correct and proper information in the form so that it does not get rejected. If you are unsure about filling it or do not know about the technicalities, it is wise to opt for a lawyer. They are well-versed and can help you in filling the genuine information properly without any chances of disapproval or rejection.

If you are interested in knowing how to avoid FIRPTA withholding, first of all you have to get the withholding certificate. It acts a pre-requisite for the Form 8288. This is the certificate that will help you minimizing the rates which you will have to pay to the Internal Revenue Service (IRS). Once it is done, you will then require Form 8288.

Procedure to Fill the Form 8288

If you want to properly understand how to avoid FIRPTA withholding, ensure to read this section carefully and how you can go about the application process. There are several details and descriptions that you may find complex in the form. Therefore, it is wise to hire a credible local lawyer who can help you in filling it seamlessly.

If you cannot find a lawyer anytime soon, follow the easy steps listed below to fill the Form 8288.

  • The first step is to determine if it applies to your real estate property interest or not. With respect to the elements mentioned in the above section, we hope you will be able to determine about the eligibility.
  • After you have determined the eligibility, next step is to obtain their tax ID number. Whether they are a foreign seller or not, they will definitely have a tax ID number. The foreign seller will have an ITIN number while the local seller will have an SSN number. When you obtain the ITIN number from the seller, you can then apply for the Form 8288.
  • Applying for the 8288 Form, you will have to fill the details such as full legal name, type of interest, address, location, contract price, and all other types of general description. You should also proofread all the information properly. After checking everything, you can send the application at the following address.

Internal Revenue Center

P.O. Box # 409101

Odgen, UT 84409

  • Once you have sent the application form, you can then notify the transferee about the withholding certificate.
  • When you provide them all the information, they will cross-check it and grant you compensation for it.

Final Word

When you are dealing with a foreign seller, you should be really very careful as they also hold false residential certification to fool buyers. This is why, you should ensure that the seller is either a local or is honest about their status. Now that you know how to avoid FIRPTA withholding, we hope you will be able to transmit the amount seamlessly.

If you need any help completing all IRS FIRPTA Withholding Certificate, please call us at 407-344-1012, or email us at info@freedomtaxfl.com.