Accountant for Tax Returns Required in FIRPTA Real Estate Transactions
Selling real estate is almost always a complicated undertaking, all the more so for foreign individuals looking to offload U.S. property. In instances like this, the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) takes effect; designed to enforce the taxation of property sale proceeds, this law requires the buyer of property held by foreign owners to withhold a certain amount of the sale amount for payment to the Internal Revenue Service.
If you or someone you know is looking to purchase property from a foreign person – or if you are a foreign person who wants to sell U.S. property – the international tax specialists at U.S. Tax Help can guide you through the process. With decades of experience navigating the complexities of the American tax system, our team is uniquely qualified to assist you with your transaction. To learn more about all our services or to set up a consultation, visit us online or call (541) 362-9127.
The Foreign Investment in Real Property Tax Act (FIRPTA)
To ensure that the U.S. government gets its cut of the sale of U.S. property by foreign people, Congress passed the Foreign Investment in Real Property Tax of 1980, better known as FIRPTA. This piece of legislation lays out the process for taxing these transactions: The buyer must withhold a portion of the payment for delivery to the IRS, effectively making the purchasing party responsible for paying the tax, though the seller still has some stake in the process. In the majority of cases, the withholding rate is 15% of the purchasing amount, though the rules differ somewhat for foreign corporations and for sales before February 17, 2016.
According to the IRS, FIRPTA applies to the disposition of U.S. real property. To put this in layman’s terms, any time real property in the United States is sold, exchanged, liquidated, gifted, or otherwise transferred by a foreign owner, FIRPTA takes effect. For the purposes of this law, “real property” refers to land and the buildings and property related to its use, which can include an interest in a natural deposit (such as a mine or well) and personal property related to land use (such as farming equipment); an interest in a domestic corporation can also be considered real property in many cases.
Understanding Tax Returns Under FIRPTA
It is important to note that the buyer bears the lion’s share of the responsibilities under FIRPTA. The law clearly states that it is the purchasing party’s obligation to determine whether the seller is a foreign person; if that turns out to be the case, and the proper amount was not withheld, the buyer may be held liable for the delinquent amount.
Once the identity and citizenship of the seller have been determined, you will need IRS Form 8288, U.S. Withholding Tax Return for Dispositions by Foreign Persons of U.S. Real Property Interests, and Form 8288-A, Statement of Withholding on Dispositions by Foreign Persons of U.S. Real Property Interests.
The first of these, Form 8288, is used to report and pay the withholding amount required by law. It should be filled out by the buyer (or their agent) and requires extensive information about both parties involved in the transaction, including the Taxpayer Identification Numbers of the buyer and seller. The second document, Form 8288-A, is a statement recording the details of the transaction, and it comes with three copies; the first two copies must be filled out and attached to Form 8288, while the third is kept for the buyer’s records.
Exemptions and Adjustments to FIRPTA Withholding Requirements
As with most tax provisions, there are a number of adjustments and exemptions that can apply to the withholding of taxes under FIRPTA. The first feature that may impact a sale under FIRPTA is the issuance of a withholding certificate, a document that can reduce the amount that must be given to the IRS.
To receive one of these certificates, either the buyer or seller must request one from the IRS; the agency will typically respond within 90 days of receipt of the application, which must include the Taxpayer Identification Numbers of everyone involved. Certificates may be given at the discretion of the IRS if, for example, the seller is exempt from taxation on their gains through a U.S. tax treaty.
There are also 11 exemptions from FIRPTA withholding that can eliminate this burden altogether. A few examples of exemptions include:
- If the buyer intends to use the property as a residence, and the amount paid for the property is no more than $300,000.
- The seller certifies (under penalty of perjury) that they are not a foreign person.
- The property being sold is stock in a domestic corporation that is traded on an established securities market.
While the exemptions to FIRPTA may represent an opportunity for one or both parties to save money, they should be used with caution; failure to observe the proper procedures could result in significant tax liabilities. A knowledgeable accountant can help you determine whether you qualify for any adjustments or exemptions and ensure that you remain in compliance with the IRS.
Call Our International Tax Specialists for FIRPTA Real Estate Transactions
Buying property can be an exciting endeavor, but the process comes with more than a few hurdles. If you or someone you know is looking to purchase property from a foreign seller, the international tax experts at U.S. Tax Help can provide assistance. Let our years of accounting experience and tax acumen work for you, so you can avoid penalties, fees, and unexpected tax liabilities. To learn more about all our services or schedule a consultation, call (541) 362-9127 today.