Foreign Nationals and the New FIRPTA Compliance
What is FIRPTA?
The Foreign Investment in Real Property Tax Act is the Federal law governing the taxation & withholding by foreign persons selling U.S. real estate. Real estate sales associates, brokers, and attorneys should advise foreign buyers of the Foreign Investment in Real Property Tax Act (FIRPTA) prior to closing. When foreign buyers are aware of the tax upon purchase, they are less likely to be surprised about the tax upon selling.
Under the old FIRPTA Rules, the buyer was required to withhold 10% of the gross sales price, although certain exceptions apply.
Under the new FIRPTA, effective in February 2016, the withholding was increased to 15% of the gross sales price. In addition, there is a distinction for Buyers using the property as a “Personal Residence” with varying treatment at different sales prices. (Certain exceptions apply here as well.)
This withholding is remitted to the Internal Revenue Service as a deposit on the income tax liability generated from the sale. When the actual income tax resulting from the sale is reported on the seller’s tax return, the withholding will be applied and the seller will either remit a sum to satisfy the outstanding balance or will receive a refund of any excessive withholding.
An exception to the withholding requirement applies to sales of real property where the sales price does not exceed $300,000 if the purchaser intends to make personal use of the property as a residence for at least fifty percent of the time the property is in use, for at least two consecutive 12-month periods following the date of purchase. This exception is not available to business entities, trusts, or the sale of vacant land.
A “foreign person” is defined under FIRPTA as a nonresident alien individual, foreign corporation, partnership, trust or foreign estate.
- This is completely separate from Immigration Status.
- Green Card Holders are not automatically exempt.
- The key question to ask Seller is what type of U.S. Tax Return they file. 1040 or 1040NR?
What is a “Personal Residence” according to IRS?
- Buyer or members of Buyer’s family (ancestors, siblings, spouse and lineal descendants) INTEND to use the property as a residence for at least 1⁄2 the time the property will be used by anyone as a residence during the first two 12-month periods following the purchase.
- If the Buyer is acquiring the property to use as a rental 100% of the time this is NOT a Personal Residence.
In other words....
- The buyer or family intends to use the property at least 1⁄2 of the time of the first two 12-month periods. (IT IS NOT CORRECT TO SAY FIRST 2 YEARS! The 12 month periods are examined separately.)
- The time when property is vacant does not count against the personal use.
- Example: Buyer intends to use the property for 3 months. They can rent it out for a maximum of 3 months and it can sit vacant for 6 months.
- If the total price of the property is more than $1,000,000, then 15% of the gross sale should be paid to the IRS.
- The 10% or 15% withholding from the gross proceeds are due to IRS within 20 days after closing when purchasing from a foreign seller.
- A “Withholding Certificate” may be applied for to allow a lesser amount to be withheld at closing. Remit amount within 20 days of date of Certificate.