Foreign Investment in Real Property Tax Act (FIRPTA)
“The disposition of a U.S. real property interest by a foreign person (the transferor) is subject to the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) income tax withholding. FIRPTA authorized the United States to tax foreign persons on dispositions of U.S. real property interests.”
Why SELLERS should care –> Foreign persons or entities might be subject to up to 15% tax withholding from the proceeds of the sale.
“A disposition means “disposition” for any purpose of the Internal Revenue Code. This includes but is not limited to a sale or exchange, liquidation, redemption, gift, transfers, etc. Persons purchasing U.S. real property interests (transferees) from foreign persons, certain purchasers’ agents, and settlement officers are required to withhold 15% (10% for dispositions before February 17, 2016) of the amount realized on the disposition (special rules for foreign corporations).”
Why BUYERS should care –> the IRS holds the buyer responsible for withholding the applicable % and submitting it to the IRS.
“In most cases, the transferee/buyer is the withholding agent. If you are the transferee/buyer you must find out if the transferor is a foreign person. If the transferor is a foreign person and you fail to withhold, you may be held liable for the tax. For cases in which a U.S. business entity such as a corporation or partnership disposes of a U.S. real property interest, the business entity itself is the withholding agent.”
Like all things IRS, FIRPTA can be convoluted, confusing, and full of exceptions and penalties. Seek expert assistance in determining:
(a) if this withholding applies to your transaction,
(b) at what rate the tax should be withheld.
Some experts you might wish to consider are on the teams page, but of course do your own research and pick your own expert!
In general, the rate schedule goes a little something like this.
|Intended Use of Property
|Gross Sales Price|
up to $1,000,000
|As a Residence||Exempt||10%||15%|
|NOT as a Residence||15%||15%||15%|
- For more information straight from the horse’s mouth, see IRS.gov’s International Taxpayers FIRPTA Withholding page.
- For another perspective, check out Frascona Joiner Goodman & Greenstein PC Attorneys at Law’s article, Don’t Forget About FIRPTA.
- For more information about the forms that will likely be involved, see Freedomtax Accounting’s article Who Files IRS Form 8288 and What Is Its Purpose along with the IRS’s pages on Form 8288, Form 8288A, and Form 8288B.
If you are the Seller and you are a foreign person or entity, you might be able to get an exemption, waiver, or reduction in withholding. However, receiving the certificate of same can take 90 days or more depending on how long it takes you and your expert(s) to get your documentation together. Once submitted, the IRS has up to 90 days to respond. So while this route can reduce or eliminate the need to have proceeds withheld at closing, it can take quite some time. Therefore the sooner you start, the sooner you can close. It’s also quite likely that you do not even have to wait until you accept an offer in order to start the process.
If you are the Seller and you are not a foreign person or entity, you will be asked to sign an Affidavit of Non-Foreign Status at closing, along with completing the FIRPTA section of the Closing Statement. This relieves the Buyer and Closing company from the need to withhold any additional amount from your proceeds for the purposes of FIRPTA. Click each image below to see the details.