FIRPTA: Frequently Asked Questions
Q: What is FIRPTA?
A: FIRPTA stands for the Foreign Investment in Real Property Tax Act of 1980. Contrary to popular belief, this act is not a tax at all, it’s a withholding. Just as the title implies, this withholding was designed to ensure that foreign owners of US property pay their share of taxes on the profits (or gain) when they sell.
Q: Who is responsible for FIRPTA withholding?
A: The IRS rules place the responsibility for withholding potential income tax due in the amount of 15% of the purchase price on the buyer of the real property from a foreign entity. The real property becomes the security for the IRS to ensure that they receive taxes that are due to them. If the payment is not made by the buyer, the IRS can seize the real property (or other assets of the buyer). The buyer should withhold 15% of the gross purchase price unless an exception applies and the withholding can be reduced. All funds must be submitted in a timely manner. The amount withheld must be submitted within 20 days following the day the closing took place. If a withholding certificate was applied for, any required funds must be submitted within 20 days of the withholding certificate notice.
Q: What if the funds are not submitted on time?
A: Interest and penalties will be assessed beginning on the 21st day after the date of transfer and ending on the day the payment is received by the IRS. These fees are payable by the Buyer.
Q: Can’t the buyer assign the responsibility for withholding to the settlement or escrow agent?
A: There are no provisions in the IRS rules for the buyer to assign their responsibility to anyone else, including the escrow or real estate agents. The escrow agent cannot provide legal or tax advice.
Q: The seller is foreign, but has a social security number. We’re okay, right?
A: If the seller is foreign, it is likely they do not have a social security number. Foreign citizens doing business and earning income in the United States are required to have taxpayer identification numbers (ITIN). These look similar to social security numbers. The test of whether FIRPTA withholding is required or not, is a statement made by the seller under penalty of perjury that they are not a non-resident alien for purposes of U.S. income taxation.
Q: What if i don’t have a US ITIN tax id?
A: Not to worry! Our team has three certifying agent on staff. We can certify your identity and complete all the necessary applications for you to obtain your US tax payer identification number fast and safe. Click HERE (link to ITIN interior page) for more information.
Applying for an ITIN is not optional. Effective November 4, 2003, all buyers and foreign sellers of U.S. real property interests are required to provide their names, addresses, and US tax identification numbers on withholding tax returns, applications for withholding certificates, and notices of non-recognition, or elections under sections IRC 897(i) when disposing of a U.S. real property interest.
Q: I don’t understand what that means, “not a non-resident alien”. What does that mean?
A: Another way to explain that (although it may not cover all situations) is that the seller must either be a U.S. citizen or resident alien with a green card.
Q: Who is considered a foreign person?
A: You are considered a foreign person if you, the “Seller” of US real estate, are a non-resident individual, a foreign corporation that has not made an election to be treated as a domestic corporation, a foreign partnership, a foreign trust, or a foreign estate. *A resident alien, electing to be treated as a US resident, is NOT considered a foreign person according to FIRPTA.
Q: The seller is taking a loss on their home. They don’t need to pay FIRPTA withholding, right?
A: Under FIRPTA there is no automatic exemption from withholding if the seller is taking a loss or no gain. If a foreign seller feels they are exempt from FIRPTA withholding because there is no gain on the sale, they need to consult with a tax expert and may find they need to apply for a withholding certificate from the IRS that will grant them the exemption on the transaction using IRS form 8288-B. If this is the case, this should occur early on in the transaction.
Q: A foreign seller doesn’t have a ITIN and is willing to pay the IRS. Can the money just be sent to the IRS without a TIN?
A: No, the IRS requires that sellers of real property have TINs.
Q: A foreign seller only owns a portion of the property. How much money does the foreign seller owe?
A: The foreign seller will owe withholding on their percentage of ownership of the property.
Q: The property is under $300,000 and the buyer is going to live in it. Doesn’t that automatically exempt it from withholding?
A: The buyer must agree to sign an affidavit stating that the purchase price is under $300,000 and the buyer intends to occupy. The buyer may choose not to sign the form, in which case withholding must be done.
Q: Isn’t a transaction from a foreign seller to a foreign buyer exempt from withholding?
A: No. The same rules apply, and both parties are required to have TINs.
Q: Are there exceptions to the 15%?
A: No withholding is required if the final purchase price is $300,000 or less and the buyer (or their family members) 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. If the purchase price is $300,001 to $1,000,000 and the buyer has definite plans to reside in the property, the 15% can be reduced to 10%. If the purchase prices is over $1,000,000, the full 15% is required regardless of the buyer’s occupancy declaration. Sellers can also obtain a withholding certificate from the IRS, reducing or excluding the required withholding. Contact us for additional exceptions that may apply.
Q: The FIRPTA withholding was paid at close of escrow, but not that much money was due to the IRS. How does the seller get their money back?
A: The seller can either in advance of closing file an 8288-B Application for Withholding Certificate to request a reduced amount or no withholding. The seller can also file a tax return the following year to obtain any refund due. A CPA or other tax expert should be consulted for guidance.
Q: The sellers and buyer don’t want to pay a CPA to answer their questions. Can’t the real estate person or escrow person help with FIRPTA questions?
A: Escrow personnel and real estate agents may have experience with FIRPTA, but are not qualified to provide advice on individual taxpayer’s situations.
Q: What if i already have an accountant or CPA?
A: Great! We often work alongside other professionals. The FIRPTA process has a lot of parts to it. We don’t require you to use us for all of them. We will work with your team to fill in the gaps.
Q: The seller lives in another country, but says they are a U.S. citizen. Isn’t withholding required?
A: U.S. citizens may be living in other countries. Current residency is not a good indication of FIRPTA status.