Regardless of whether the person is a local investor or a non-resident (foreign) investor, it is obligatory for them to pay taxes. For foreigners, it is difficult to reside in the United States. They either have to get employment or develop and direct their own business in the United States to do so. While some people solely come for earning a income, some people come as dependents of the principal investors. No matter the reason they are coming to the United States, they need to pay off taxes. One of the main things that come to mind when we talk about taxes is FIRPTA. This is why we can see most people asking, “what does FIRPTA stand for?”

Those foreign investors who tend to start a real estate business in the United States fall under FIRPTA withholding. This is why so many foreign investors and buyers who deal with them are concerned about what does FIRPTA stand for? Moreover, when it comes to paying taxes, foreign and local investors need to have tax ID numbers, such as an SSN number, ITIN number or EIN number. Foreigners who deal in real estate properties are taxed on the gain on sale of the real estate property. Also, they are taxed on the connected income and source income while the locals are taxed on their regular income. With the new Internal Revenue Code system 897, the FIRPTA Law has undergone some new modifications. This is why so many people are thinking about what does FIRPTA stand for, and what the new modifications are?

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

When we talk about real estate property taxes, we are specifically referring to FIRPTA. Those buyers who deal with a foreign investor’s real estate property are likely to find the transaction really expensive due to the higher tax amount associated with it. However, there are certain exemptions for FIRPTA which you may also be interested in. According to the new FIRPTA law, buyers who now deal with a foreign investor’s real estate property need to pay 15% on disposition. When buyers want to transfer the amount, they may opt for FIRPTA withholding or FIRPTA form 8288.

If you want to explore what does FIRPTA stand for and all other relevant details related to it, this blog will help you understand everything.

What Does FIRPTA Stand For?

FIRPTA stands for Foreign Investment in Real Property Tax Act. Now that you know what does FIRPTA stand for, it will become easier for you to understand the core details associated with it. FIRPTA is one of types of real estate property taxes for foreigners. It is the amount of tax that is charged on the disposition of a United States real estate property. It claims some deductions for business operations and trade to satisfy real estate property interests and to pay local taxes. Concisely, it is the law set by the federal government of the United States to withhold a certain amount from the gain on sale of the foreigner’s real estate property.

After understanding what does FIRPTA stand for, you also need to know that when foreigners do not hold a green card or legal proof of identity of the United States, they are considered as non-resident aliens. Setting up a business in the home country may result in them being charged with lower taxes, but dealing in real estate (in specific) internationally, in United States, would require them to pay more taxes.

Before 1980, there was no law for FIRPTA withholding. In the year 1980, the United States Congress passed the Foreign Investment in Real Property Tax Act (FIRPTA). This law stated that the Internal Revenue Service (IRS) has the right to deduct some amount from the gain on a real estate property sold by a foreign investor. This law is solely established to tax the foreigners; this is why local sellers are not being taxed on selling the real estate property. If a non-resident alien now holds a license, proof of identity of being a citizen of the United States or has SSN number, they will be considered as residents of the United States and would not be liable to pay the 15% as FIRPTA withholding.

Before 1980, there was no way for the IRS to get taxes from the benefits of foreigners. But now, when a buyer purchases a United States real estate property from a foreign real estate seller, 15% of the total sale price of the real estate property is withheld by the IRS. This is a costly method and can be expensive to the buyers as well as foreign sellers. This is why people who are asking, what does FIRPTA stand for, also look for ways to transmit, or at least reduce the FIRPTA withholding amount.

Now that you know the answer to what does FIRPTA stand for, you should also keep in mind the ways to transmit the withheld amount. One of the best ways to reduce or transmit the amount is to apply for withholding certificates. After applying for these certificates, you will be able to get Form 8288. You can fill up your details in it and easily get the permission to transmit the amount. But this has some limitations and exceptions. We will be explaining the entire procedure in our further sections.

Are You Really Dealing With A Foreign Person?

If you are asking, what does FIRPTA stand for, you first need to see whether or not you are dealing with a foreign seller. In order to determine and understand that, you first need to know the definition of a foreign person under FIRPTA as defined by the IRS. Some foreign people and entities who fall under FIRPTA law are listed below;

  • Partnership
  • Trust
  • Foreign estate
  • Non-resident alien individual
  • Foreign corporation

FIRPTA Rules Necessary To Keep In Mind

FIRPTA is really very important for foreign sellers who are dealing with real estate property. Also, there are certain rules and important considerations that you should always keep in mind. Those who are asking what does FIRPTA stand for should carefully read the following;

  • If you are a foreign seller of a real estate property, you would have to insure 15% of the sales price from the real estate property. This amount is obligatory to be withheld by the IRS as a seller’s tax obligation. Previously, the percentage was 10% but as per the new FIRPTA law, there was a 5% increase in the withholding requirements. Some other states have different requirements as well. Therefore, ensure to consult you local lawyer for FIRPTA withholding.
  • This requirement is only limited to the foreign real estate sellers. Since they do not hold legal proof of identity, this is why they are liable to pay off the taxes. Those who are US citizens, hold green cards, and those non-resident aliens who have fulfilled the requirements to be granted citizenship are not liable for FIRPTA withholding. According to research, most foreign owners have applied for green card, SSN numbers and legal proof of identification for the United States. They have done this because a foreigner selling real estate properties to locals was becoming really expensive for them.
  • There are certain exceptions, out of which one of the main ones on which FIRPTA does not apply is the limitation to price. If the buyer is looking for a real estate property that is less $300,000 in value, it will not be liable for FIRPTA withholding as it will be considered as the buyer’s primary residence.
  • If you are concerned about what does FIRPTA stand for, you need to know this important rule that you can also reduce or transmit the amount of tax. However, it requires approval from the IRS. In order to reduce or transmit the 15% amount of taxes, you need to take action for it. Some important documents that can help you reduce or transmit the amount of FIRPTA withholding are listed below;
    • Sale of currently inherited property
    • Withholding certificate
    • Form 8288
    • A tax free sale document – Section 1031 Exchange
    • Sale at a small loss or profit

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

5% Increase in FIRPTA Withholding Rate – 15% FIRPTA Rate

In many cases, the buyer of a real estate property interest is required to pay taxes on the real estate property they have purchased from the foreign seller. Until January 2016, they had to withhold 10% as taxes but now, after the FIRPTA laws have been modified, with the amount has risen by 5%.

This increase in rate was mentioned in Section 324. Those who are worried about what does FIRPTA stand for are now also worried about their losses. They can avoid these losses by going to the local real estate buyer in the first place or by signing FIRPTA Form 8288 to transmit the withholding amount.

How To Avoid And Minimize FIRPTA Withholding

Now that you know the meaning of what does FIRPTA stand for, let us help you figure out how you can avoid it. Ever since the new law has passed and the modification to the withholding rate, from 10% to 15%, an increase of 5% has become really very costly to the buyers. Setting aside 10% from the sale price was already troublesome for them and now, with that percentage having increased, it has become more expensive for them.

This is why people who are concerned about what does FIRPTA stand for are also trying to figure out the ways to avoid or transmit FIRPTA withholding. While we have given you a slight overview to how you can transmit or reduce the amount in the fourth point of the FIRPTA rules section, let’s help you understand the detailed procedure in this section.

Withholding certificates can help you in this regard, but you also need to keep in mind that the these certificates will only help you in reducing some burden and may not be able to entirely transmit the amount. It can be possible only in some circumstances, which is when you fall under FIRPTA exemptions. We will be explaining them in the next section. Understand the process below to avoid FIRPTA withholding.

Obtain a Withholding Certificate

When a foreigner has a withholding certificate in hand, they are able to reduce the withholding requirement set by the IRS. Any party, either the foreign seller or the buyer, can apply for the withholding certificate by contacting the IRS. You need to obtain the withholding certificate before sale.

In order to issue the withholding certificate, you need to send an application to the IRS. A withholding certificate is basically a form. Form 8288 is a type of withholding certificate that you need to issue. Some of the reasons that may require you to issue the withholding certificate are as follows;

  • To provide security for taxes by the transferee or transferor.
  • When exemption from the United States has been realized by the transferor.
  • When the IRS declares that withholding certificate to reduce or transmit the amount. This likely happens in cases where the buyer is exempted from FIRPTA withholding.

Form 8288

The Treasury Department provides sample certifications. They provide forms to obtain exemptions from withholding. These certifications are issued by the IRS and state that non-resident alien are not obliged to pay the taxes or are exempted due to some reason. The reason is given by the transferor or transferee (whoever is filling the form). This certification is made under the penalty of perjury. Those who are concerned about what does FIRPTA stand for need to understand this section carefully in order to avoid FIRPTA withholding.

Form 8288 – A and Form 8288 – B are two sealed and stamped forms. One of the copies is kept by the Internal Revenue Service i.e. Form 8288 – A while the other copy, Form – B, is given to the foreign seller. After they receive the form, they are then required to attach the forms with the tax returns and tax amount that are required to be submitted and paid. These forms give you the ability to transmit the amount. But if you fall under the exemptions, you need not worry and you can completely transmit the amount by using this form.

Application Process To Avoid FIRPTA Withholding

Now that you know what does FIRPTA stand for, you may be worried about about tax withholding. You can ignore, reduce or transmit that amount by applying for the form. Here are some steps for you to follow to avoid FIRPTA withholding.

·       Step # 1: Eligible for FIRPTA

The first thing that should come to your mind before applying is to see whether it applies on your transaction or not. Here are some factors on the basis of which you can determine your eligibility for FIRPTA withholding;

  • You will be considered for FIRPTA withholding if you are a foreign person, are dealing with a local United States real estate property interest and are selling it in the United States.
  • You will be liable for FIRPTA if you do not fall under the limitations or exceptions of FIRPTA withholding.

·       Step # 2: Put Tax ID Number

The next step is to ask for the tax ID number from the IRS. There are 3 types of tax ID numbers. You can either have an Individual Taxpayer Identification Number (ITIN), a Social Security Number (SSN) or an Employer Identification Number (EIN). Based on your status, you will be provided the tax ID number. Also, you will have to fill the W-7, SS-5 and SS-4 form respectively to get your tax ID number.

·       Step # 3: Withholding Certificate Application

When you get your tax ID number, it is time to apply for a withholding certificate. This is the main step to avoid FIRPTA withholding. So, ensure to fill Form 8288 carefully. You also need to sign and get the application stamped properly. Here are the main elements that you should cover;

  • Full legal name
  • Your complete address
  • Your Taxpayer Identification Number (TIN)
  • Mention if you are a transferor or transferee
  • Mention the name, address, and TIN of all other people involved
  • State the contract price, general description and location of the property

After filling all this information carefully and correctly, it is time to send the information to the following address.

Internal Revenue Service Center

P.O. Box 409101

Ogden, UT 84409

·       Step # 4: Notify the Transferee and Report

After submitting the application form, you can now notify your transferee that you have applied for the withholding certificate. After the approval from the IRS, they will send you compensation. In the end, you will have to report your sale of exchange.

Exemptions from FIRPTA Withholding

After understanding what does FIRPTA stand for, you also need to know about the exemptions. You will not be liable for FIRPTA withholding if any of the following applies to your situation;

  • If the amount is not more than $300,000
  • If it is a domestic corporation
  • If the corporation was not held by a United States Real Property Holding Corporation in the past 5 years
  • If you get a withholding excuse directly from the IRS
  • If the transferor realizes that the real estate property interest is zero

Now that you know what does FIRPTA stand for and how you can avoid paying the withholding amount, we wish you all the best in all your future real estate dealings.

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