Accountant for Buyers of US Real Estate Property that Require FIRPTA Withholding

Buying property in the United States is plenty complicated under the best of circumstances, let alone when purchasing from a foreign citizen or business. Unfortunately, those in this situation will have to deal with the Foreign Investment in Real Property Tax Act of 1980, a lengthy bit of legislation that imposes very specific requirements on any sale of real estate or property interests to a foreign person.

Assistance with FIRPTA is available anywhere in the world from the qualified team of certified public accountants at U.S. Tax Help. Ted Kleinman, CPA, has more than 30 years’ experience dealing with the implications of overseas accounts and transactions as they relate to the American taxpayer, and he stands ready to help with any tax issue you might have, including any with FIRPTA. To schedule a consultation, call us today at (541) 923-0903.

How the Foreign Investment in Real Property Tax Act of 1980 Affects You

Although the Foreign Investment in Real Property Tax Act of 1980, or FIRPTA, only relates to very specific types of purchases, it is still important to know how it may affect your transaction. Essentially, FIRPTA was created to ensure that the sale of real property interests by foreign entities was still taxable by the U.S. government. To accomplish this, the IRS compels the buyer to set aside a portion of the revenue, rather than the seller, lest the buyer wind up liable for the tax burden themselves.

To comply with FIRPTA, the buyer of any real property interest must first identify whether the entity selling the property is foreign or domestic. If the seller is domestic, simple obtain a signed affidavit saying as much and consider your FIRPTA obligations resolved; if they are foreign, you will likely have to withhold some portion of the sale amount for the IRS.

For the sake of FIRPTA compliance, the term “real property” extends to a wide range of assets, including the obvious – land, buildings, and other common types of real estate – and the less typical – mines, wells, natural deposits, and even personal property (such as farming equipment) used in conjunction with real property.

In most cases, the purchasing party must withhold 15 percent of a sale for taxes, though there are some exceptions to this rule. One of the most common is the residency exception, which will be explained below.

Residential Exceptions for FIRPTA Withholding Requirements

While the 15 percent tax is more or less standard across the board with transactions of this type, a notable exception exists for those purchasing a primary residence for themselves or a family member. However, it only applies in situations where the buyer has a definite plan to live at the property at least 50 percent of the time over a two-year period following the purchase.

If this applies in your case, then there are some financial thresholds to keep in mind. The first and most important of these is the $300,000 threshold. If you are paying less than $300,000 for a property, you are required to withhold exactly 0 percent of the value for the Internal Revenue Service – making this a potentially lucrative amount to consider.

If, however, the value of the sale is more than $300,000 and less than $1,000,000, you may be eligible for a reduced withholding rate of 10 percent, instead of the usual 15 percent. The same residency requirements are still a factor for this rate, but the savings can nonetheless be substantial.

What to Do If You Face FIRPTA Withholding Requirements

If you find yourself beholden to the requirements enshrined in FIRPTA, you may be wondering how the reporting process works. To start with, you’ll need to find Form 8288 on the IRS website, labeled U.S. Withholding Tax Return for Dispositions by Foreign Persons of U.S. Real Property Interests. This is the form on which to report the acquisition of real property interest, and the form with which you will pay the IRS’s portion.

Form 8288-A is mostly used for the purpose of reporting any amount withheld, both for the records of the IRS and those of the seller. It is important that all copies of this form are complete – it will come with three copies, the third of which is for you to keep. The second copy will be stamped by the IRS and sent to the seller, provided it contains their Taxpayer Identification Number.

Trust the Experienced Accounting Specialists at US Tax Help

To anyone who may be struggling with the tax implications of a real estate purchase from a foreign person, know that you’re not alone. The skilled accountants at U.S. Tax Help are standing by to help you through this difficult process, no matter where you live. Contact us today at (541) 923-0903 and schedule your first consultation.

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