WHAT YOU MUST KNOW ABOUT FIRPTA
Foreign Investment in Real Property Tax Act [FIRPTA] . The act was enacted in 1980 and was created to allow the United States to tax foreign persons on dispositions of US real property interests. What you Must Kow about FIRPTA.
Real property can include everything from buildings, improvements on lands and land. In order to determine if the property is real or not, it is decided by the laid concepts under tax laws for the US.
Basically, if you’re a foreign person selling any real estate or your interest in any real estate, this tax most likely applies to you.
WHO is Does the Tax Apply to?
The tax applies to foreign persons transferring an interest in real property. Per the IRS, foreign persons are defined as a nonresident alien individual, a foreign corporation that has not made an election under section 897(i) of the Internal Revenue Code to be treated as a domestic corporation, foreign partnership, foreign trust, or foreign estate. It does not include a resident alien individual, only nonresident aliens.
So, if you are a US Citizen or a US Resident, FIRPTA does not apply to you.
HOW MUCH is the Tax and How is it Paid
Although the taxable gain of a transaction is earned by and thus taxable to the foreign seller, the buyer is held liable for the tax if it is not paid by the foreign seller. Therefore, the buyer of the property (via their attorney/closing agent) will withhold 15% of the sale price in escrow from the cash distributed to you at closing. In more complex transactions, 15% of the amount realized will be withheld. The amount realized is defined as the sum of cash paid, the fair market value of other property transferred, and the amount of any liabilities assumed by the buyer, and the amount of any liabilities the property was subject to immediately before the transfer. The 15% that is withheld is paid to the IRS.
Remember, it is the buyer, not the seller, who is obligated for withholding and reporting required by FIRPTA at the time of the sale. Unless the transaction is exempt from withholding, the buyer must report the sale to the IRS on Forms 8288 and 8288-A, and pay the required tax withholding, by the 20th day after the date of transfer.
What is Considered a Disposition
Disposition means a sale, exchange, liquidation, redemption, gift, transfer, etc. It is important to note that FIRPTA applies not only to the disposition of the real property itself, but also to the disposition of an interest in real property. For example, when a property is owned by multiple shareholders of a Company, each shareholder has an individual interest in the property.
EXCEPTIONS from FIRPTA Withholding
There are a few exceptions, In every Rule.
Prior to the transfer, the seller may apply for an IRS withholding certification to reduce or eliminate the required amount of the withholding. The IRS is required to act on a request for a withholding certificate within 90 days of receipt of the application. Generally, you should apply for the withholding certificate if you think one of the following situations applies to you:
1) The buyer is acquiring your property as their personal residence, and the sale price is not more than $300,000. The buyer must have plans to live in the property at least 50% of the time the property is not vacant. For this exception, the buyer must be an individual.
2) The property that is being disposed of enjoys an interest in a domestic corporation whose stocks are traded regularly in an established securities market. However, this exception from FIRPTA withholding doesn’t apply to many dispositions of considerable amounts of non-publicly traded interests in openly-traded corporations.
3) The disposition is of an interest in a domestic corporation and the interest transferred is not US real property interest. You must produce a certification stating, under penalties of perjury, that the interest is not a US real property interest. In most cases, the corporation can make this certification only if either of the following is true:
• During the previous 5 years (or, if shorter, the period the interest was held by its present owner), the corporation was not a USRPHC (US Real Property Holding Corporation).
• As of the date of disposition, the interest in the corporation is not a US real property interest by reason of section 897(c)(1)(B) of the Code.
4) You receive a withholding certificate from the Internal Revenue Service that excuses withholding.
5) No recognition of any gain or loss on the transfer is required because of a nonrecognition provision in the Internal Revenue Code or a provision in a US tax treaty.
6) The amount you realize on the transfer is zero.
7) The property is acquired by the United States, a US state or possession, a political subdivision, or the District of Columbia.
8) The disposition is of an interest in a publicly-traded partnership or trust. However, this exception does not apply to certain dispositions of substantial amounts of non-publicly traded interests in publicly traded partnerships or trusts.
Please refer to the IRS for a full list of exceptions. And of course, Do consult with your accountant and or a Tax attorney for your specific situation, as every situation is unique.
The above is intended for information and not meant as legal or tax advice of any kind.
QUESTIONS? COMMENTS? CONCERNS?
I’d love to hear from you! Drop me a line or give me a call anytime!
Let’s Chat email: jm@jmligonde.com Direct Call: 786-529-0508
