FIRPTA Foreign Investors Real Property Tax Act of 1980
Rules and regulations for the FIRPTA provisions are governed by the Internal Revenue Service. Internal Revenue Code Section 1445.
Any foreign person (non-resident alien) who has any ownership interest in U.S. property are subject to these regulations. U.S. property interest held by a foreign corporation, partnerships or trusts are also subject to the FIRPTA regulation.
For purposes of this article we are referring to individual interests in U.S. real property.
Two general rules that are important to know when a foreign individual is selling U.S. real property; the withholding requirements and the tax identification requirements.
A foreign person ( non-resident alien) who is selling a U.S. real property interest is subject to the 10% withholding requirements. The withholding is based on the gross selling price. Generally the withholding is due and payable to the IRS on the date of closing.
There are provisions in FIRPTA that can reduce or eliminate the amount of withholding.
1. Exemption Certificate
A client can file for an exemption certificate to reduce or eliminate the withholding at the time of closing. The application MUST be filed on or before the closing date. This is done by an acceptance agent or approved accountant by the IRS. The form 8288B is the exemption certificate. The IRS will respond within a 90 day period. The closing agent, if in possession of a timely filed withholding certificate, can hold funds in escrow until the IRS acts upon the application.
A client may claim a refund by filing an income tax return rather than filing exemption certificate. The return can only be filed after the end of the calendar year. So having a closing in March would mean not filing till January of the following year.
A client can avoid the withholding if the property is selling for $300,000.00 or less, however there are some requirements to do so;
a). $300,000.00 or less
The sales price MUST be $300,000.00 or less. NO exceptions! A penny over and you are out.
b). Buyer is a human
The buyer must be an individual (or couple) who is a U.S. citizen.
c). Buyer uses property as a personal residence
The buyer MUST use the property as a personal residence. However, this does not mean a sole residence or a principal residence. The buyer must use it “enough”. “Enough” means in the first 24 months of ownership the buyer (or the buyers family members) will occupy the property for at least 50% of the time that the property will be used at all.
If the above 3 requirements can be met, the buyer will sign an affidavit to such effect and the client will be exempt from the withholding.
Since 2003 the IRS requires any foreign persons selling U.S. real property to have a tax identification number or TIN.
Does this apply to you?
(*If you are a resident alien, you will need to provide your permanent residence card and your TIN.
A Tax ID number is required for all parties to the transaction. “NO TAX ID #. NO CLOSING!”
For more information please visit www.irs.gov
**This info does not constitute legal advice.