Understanding all tax stipulations surrounding real estate is important to refrain from being liable for this tax amount. One of the most important taxes is known as Foreign Investment in Real Property Tax Act (FIRPTA).
What is FIRPTA?
This is a U.S. tax law that can be difficult for foreign investors and companies to understand. This law goes into effect when foreign sellers of real estate in the United States owe taxes on gains from a sale. The FIRPTA requires that any buyer of a U.S. real property interest is to withhold a certain set percent of the amount required by the foreign seller. This is the buyer’s responsibility, not the seller’s (closer’s).
As of 2016, FIRPTA requires that a buyer must withhold 15% of the amount from a foreign seller in the sale of an interest in U.S. property. If the seller is a foreign person and the buyer fails to withhold, they may be held liable for this tax.
Improperly addressing FIRPTA can lead to liability and prosecution by the Internal Revenue Service. A FIRPTA lawyer can help you to determine whether or not you’re subject to FIRPTA. Also, the rules of FIRTPA constantly change and have just last year, so make sure to hire a real estate agent that is knowledgeable on any and all changes.
The amount realized for FIRPTA will depend on the sale or contract price. The amount withheld will also depend on if the company is a corporation, trust, estate or partnership.
Proper tax forms must be filled out by both the buyer and seller for the IRS. A FIRPTA affidavit is received from the seller stating whether or not they are a non-resident alien. Ultimately, in order to avoid any surprises, it’s important to consult a tax attorney who can navigate the rough waters of taxes and property sales/purchases. No matter what you’re purchasing, having a professional behind you who can guide you throughout the process is important.
This requirement applies in all real estate transaction with a foreign seller except:
- The seller has an affidavit stating that they are not a foreign person and offer a U.S. taxpayer identification number such as a social security number. Please note that a resident alien is not considered a “foreign” person in the eyes of the IRS so they don’t have to withhold this tax. This means they have a valid green card or was present in the United States for a certain number of days a year (183 or more).
- The buyer receives a statement from the Secretary of the Treasury stating that the foreign seller arranged to pay the tax.
- The transfer is of an interest in a non-publicly traded domestic corporation where an affidavit has been made that these are not U.S. real property interests.
- The buyer acquires the property for use for a residence or the sale price does not exceed $300,000.
- The interest is a share of a class of stock regularly traded on a securities market.
Issues You May Have With Your Current Transaction
- Your seller is a foreign person with no valid social security number
- You haven’t received a statement stating that the foreign seller will be paying the tax
- The transfer isn’t for a residential purchase and/or is more than $300,000 USD.
If you’re experiencing any of these potential issues with your current transaction, please give ATS a call for a free consultation with one of our attorneys today.