Understanding FIRPTA (Foreign Investment in Real Property Tax Act)

Do you own a property in the United States and you are not a citizen of the US? If so, when selling that property you may be subject to FIRPTA which stands for the “Foreign Investment in Real Property Tax Act.” Congress passed this law back in 1980 to ensure that the government would be able to collect the same tax from foreign sellers of real property that they are usually able to collect from Americans. Otherwise, too many foreign sellers would simply take off back for their home countries with the money and retreat beyond IRS collection agents’ reach. To prevent that from happening, Congress came up with a requirement that those buying real estate from a  person that is neither a citizen nor a legal U.S. resident must withhold a portion of the purchase price – and  forward it to the IRS within 20 days of closing.

Normally, if a foreign person is selling a property the tax withholding requirement can go up to 15% of the total of the sale.

That can really knock the wind out of your sails – especially if you are counting on that money to roll into another property or to live on. Many sellers get caught by surprise by this requirement.

Who is a ‘foreign person?’

For FIRPTA purposes, the term ‘foreign person’ includes the following:

  • individual non-resident aliens
  • foreign corporations
  • foreign estates
  • foreign estates
  • foreign trusts

How To Avoid or Reduce FIRPTA Withholding

Congress made several exceptions to FIRPTA withholding. Here are the common ways you can avoid the requirement :

1 – Meeting a basic price and use test.

  • The property sale is under $300,000 (which applies to very few properties in the South Florida market these days), AND;
  • The buyer needs to sign an affidavit verifying that they plan to use the property for personal purposes at least 50% of the time, for each of the first two 12-month periods after closing.

In this case, if you want to avoid the withholding, and your asking price is at or just a little above $300,000, it  might be worthwhile to reduce the sales price, and hold out for a residential buyer who plans to live in the  property.

There is some risk to this course of action, however: If the buyer winds up not using the property as a personal  residence for at least half of the first two 12-month periods after the sale, then you’ll become liable for the  tax.

2 – Become a permanent resident 

Permanent U.S. residents and selling property are not subject to FIRPTA withholding. If you’re planning on becoming a permanent resident or citizen, consider postponing the sale until after you receive your Green Card. However, you must note, this option will bring other tax consequences as you be taxed on your worldwide assets and a Pre-immigration Tax Plan might be recommended.

3 – Obtaining a withholding certificate

The IRS may adjust or eliminate the withholding requirement if you show that your tax liability for the  sale will be lower than the normal withholding requirement, or that lowering or waiving the withholding requirement will not jeopardize their ability to collect the tax.

The IRS recognizes some circumstances that may result in a reduced or eliminated withholding  requirement, we are detailing some of the most common ones:

  1. Your planned sale is tax-exempt, or otherwise entitled to nonrecognition treatment.
  2. The maximum expected tax liability is less than the amount that would normally be withheld;
  3. You make an agreement with the IRS to pay the taxes yourself, and have collateral to ensure they can collect;
  4. Other circumstances deemed acceptable by the IRS.

We can help you with a withholding certificate exempting you from some or all of the withholding  requirement by filling out and submitting an application for a withholding certificate. As part of the  application, you’ll need to calculate your tax basis in the property and calculate your estimated capital gain  and tax. The IRS made some recent changes to the rules regarding the taxation of repairs vs. capital  improvements.

Note: Plan on it taking the IRS up to 90 days to process your request. This is not a strategy you want to be executing at the last minute. Plan ahead, well before the sale.

4 – Sell or transfer the property to the United States government, a U.S. state or possession, a political subdivision, or the District of Columbia. 

If you’re selling to a U.S. government entity, they aren’t subject to the withholding requirement.

5 – Restructure to a non-foreign entity  

Even if one owner is a foreign national, the IRS deems certain domestic entities to be U.S. Persons for  the purposes of enforcing FIRPTA withholding. As such, some types of U.S. entities are not subject to the  withholding requirement when they sell properties.

6 – Sell or transfer the property as an interest in a publicly-traded domestic corporation.

There’s no FIRPTA exemption requirement if the property is sold as an interest in a corporation with  shares regularly traded on a U.S. stock exchange or formal securities market.

As you can see, there are many exceptions to FIRPTA withholding and our professionals can review your specific case to determine whether the withholding apply or if we could use an exception.

Other frequently-asked questions about FIRPTA

What happens if the withheld amount doesn’t cover the tax? 

If the withholding is less than the amount of tax you owe, you will still need to pay the difference when you file your tax return.

What happens if I owe less tax than the amount withheld? 

On the other hand, if the amount withheld is greater than the tax you owe, you can normally get a refund for the excess amount withheld when you file your tax return.

What if I’m buying from a foreign seller?

If you’re buying real estate from a foreign seller in the U.S., and it doesn’t meet one of the exceptions you are probably subject to the FIRPTA withholding requirement. It’s up to  you, the buyer, not the seller, to withhold 10% or 15% of the sale, as appropriate (depending on the price), and transfer it to the IRS within 20 days of closing.

Work with a qualified CPA

FIRPTA rules are complex. If you are a foreign national or represent a foreign entity, estate, or trust, and you are considering selling real estate in the United States, call us today. By working with a qualified tax expert who is experienced in this area of tax law, you may be able to save a good deal of money, as well as the time and effort it would take to learn all the ins and outs of this very arcane subject.

Abitos CPAs and Advisors. "Selling a Property? Here’s What You Need to Know About FIRPTA". 11.30.20, https://abitos.com/selling-a-property-what-property-sellers-heres-what-you-need-to-know-about-firpta/.