How Does FIRPTA Withholding Work
Suppose you recently purchased a property from a foreign person or corporation. In that case, it’s important that you understand the Foreign Investment in Real Property Tax Act (FIRPTA) and how it impacts your transaction.
If real U.S. property is transferred from a foreign person to an American citizen, FIRPTA withholding may apply. Under FIRPTA, a buyer may be required to withhold funds from a sale to cover taxes owed on the property transfer. While there are exceptions to FIRPTA withholding requirements, they only apply to specific situations. Understanding FIRPTA withholding rates and how to report withheld funds to the IRS can be challenging. Penalties for non-compliance with FIRPTA can be severe. Instead of incurring penalties because of improper withholding or reporting FIRPTA taxes to the IRS, consult an experienced tax accountant for help.
Our experienced professionals are here to help Americans comply with FIRPTA withholding requirements. To learn more about how the tax accountants at US Tax Help can assist you, call us today at (541) 362-9127.
What is FIRPTA Withholding?
Property transactions between citizens and foreign persons are heavily monitored in the United States. The Foreign Investment in Real Property Tax Act allows the United States to keep tabs such transactions and prevent foreign persons or companies from profiting excessively from selling U.S. real property interest and not paying taxes.
The Foreign Investment in Real Property Tax Act was made federal law in 1980. This piece of legislation was designed to prevent foreign investors from purchasing and selling large amounts of American farmland, tax-free. FIRPTA seeks to prevent foreign investors from avoiding capital gains taxes on the sale of various types of U.S. real property interest, from land to stocks and bonds. The Foreign Investment in Real Property Tax Act still exists today and primarily impacts Americans that engage in real estate transactions with foreign people or corporations.
Under FIRPTA, a portion of the capital gains from a transfer of property between an American and a foreign person or company must be withheld. While the IRS imposes a standard rate, the exact amount withheld will depend on the gain from the sale itself.
FIRPTA withholding can be a complicated subject. Since this concept may be widely unknown to Americans who have never done real estate or other transactions with foreign persons or corporations, it’s important to consult an experienced tax accountant. While you may be unaware of FIRPTA withholding requirements and all they entail, that does not make non-compliance okay in the eyes of the IRS. If you’re unsure whether you have to abide by FIRPTA after a recent property purchase, speak to a tax CPA.
Important Definitions Under FIRPTA
Understanding the Foreign Investment in Real Property Tax Act rules requires a comprehension of many confusing terms. Because there are many words with FIRPTA-specific definitions, learning certain terms can help you better understand FIRPTA as a whole.
Regarding FIRPTA withholding, the term disposition refers to the sale or purchase of real estate or other property by a foreign person to an American buyer. The term disposition can also refer to certain transactions between foreign and domestic companies and individual people.
U.S. Real Property Interest
The term U.S. real property interest can be confusing at first, but it is relatively simple. Essentially, U.S. real property interest refers to any interest in real property in the United States. That is a complicated way to say that the term includes any property or assets in the United States. This can include things like real estate or interest in a company. To gain a deeper understanding of U.S. real property interest and how it applies to your recent transaction, speak to a tax accountant.
Concerning FIRPTA, a foreign person is defined as a non-resident alien or a foreign corporation, partnership, trust, or estate. Resident aliens are not considered foreign persons under the Foreign Investment in Real Property Tax Act.
Under FIRPTA, a transferor is a foreign person, corporation, partnership, trust, or estate that sells, exchanges, gifts, or transfers U.S. real property interest to a person, shareholder, partner, or beneficiary of a trust or estate.
The transferee is any person, including Americans, resident aliens, and non-resident aliens, who purchases or otherwise acquires U.S. real property interest from a foreign person. Essentially, a transferee purchases real estate or other types of property from a foreign person.
What is the Current FIRPTA Rate of Withholding?
Suppose you have a FIRPTA withholding obligation because of a recent purchase of U.S. real property interest from a foreign person or corporation. In that case, it’s important that you understand the current rate of withholding. The standard rate can change periodically to adjust for inflation, so it’s possible that it has changed since your last transaction with a foreign person.
As of 2022, the current FIRPTA rate of withholding is 15%. For all dispositions or sales before February 17, 2016, the rate of withholding is 10%.
If you have a FIRPTA obligation, you must withhold 15% of the amount a foreign person realized on the sale of U.S. real property interest. This amount can be in the sum of cash paid to the foreign person, the fair market value of the transferred property, or the amount of liability a transferee assumes.
There are also specific withholding rates and requirements for corporations jointly owned by American and foreign persons and for domestic corporations that distribute property to foreign shareholders. The specifics of these rules are extremely complicated and only applicable to certain scenarios. Consult a tax accountant to ensure you withhold the appropriate amount after a transaction with a foreign person or corporation. Remember, FIRPTA withholding rates can change from time to time, and it’s important that you withhold the correct amount.
Who is Subject to FIRPTA Withholding?
All parties aren’t required to withhold funds after a property transfer involving a foreign person or corporation. Generally, the buyer, not the seller, must abide by FIRPTA withholding requirements. As a transferee, it’s your job to know whether or not you have a FIRPTA obligation.
Suppose you are preparing to purchase property in the United States from a foreign person or company. In that case, it is your responsibility to withhold tax on the amount realized by a foreign person. That means you are responsible for withholding FIRPTA funds and reporting them to the IRS.
Again, FIRPTA withholding generally applies to transferees, not transferors. If you are exempt from FIRTPA withholding requirements based on a transferor’s qualifications, it is their responsibility to inform you of this exemption and provide the necessary certification.
If you are unaware that the person you are purchasing U.S. real property interest from is a foreign person, and you fail to withhold FIRPTA funds if required, that is on you, not the seller. To prevent such mistakes from impacting you, ask a tax accountant for clarification regarding your FIRPTA withholding liability.
Does FIRPTA Apply to All Real Estate Transactions?
The Foreign Investment in Real Property Tax Act most commonly impacts Americans that purchase real estate from foreign persons. Depending on your recent real estate transaction, you may be unsure whether or not FIRPTA applies to you. What if American expatriates are involved? How about resident aliens? Our experienced tax accountants are here to set the record straight about how FIRPTA relates to these complicated property transfers.
If you live abroad and purchase property in the United States, you may be responsible for FIRPTA withholding. That all depends on whether or not the seller in question is a foreign person. If not, you won’t have to worry about reporting withheld funds to the IRS as an American expatriate.
Suppose you’re an American expatriate living in another country and plan on selling your previous stateside home to establish residency overseas. In that case, you may be wondering whether funds will be withheld on the sale of your house. As long as you retain your American citizenship, you won’t be considered a foreign person under FIRPTA. While you’ll still most likely have to pay capital gains taxes on the sale of your property, that amount won’t be withheld by the buyer upon purchase.
Resident Alien Seller
In the eyes of the IRS, resident aliens are treated just like any American citizen. Because of that, Americans that purchase real U.S. interest property from a resident alien will not have to withhold FIRPTA taxes. Remember, to be considered a foreign person under FIRPTA, a transferor cannot be American or be a resident of the United States.
Resident Alien Buyer
If you, as a resident alien, purchase real U.S. property from an American citizen, you will not have a FIRPTA withholding obligation. You will, of course, have to withhold taxes for FIRPTA if you purchase property from a foreign person or corporation.
If a foreign person purchases property from a resident alien or American citizen, there is no FIRPTA withholding obligation. Remember, FIRPTA withholding is only necessary when a seller is a foreign person. The buyer’s nationality is of no consequence under the Foreign Investment in Real Property Tax Act.
Are There Exceptions to FIRPTA Withholding Requirements?
While many that engage in international real estate transactions or other property transfers with foreign persons are subject to FIRPTA withholding requirements, there are some exceptions. It’s important to understand whether or not you are exempt from FIRTPA withholding and what documentation you may need in order to prove an exemption.
Home value is one of the most common FIRPTA withholding exceptions cited by buyers. If you purchase a property valued at less than $300,000 from a foreign seller, you may not have a FIRPTA withholding obligation. You and your family must also live in the purchased property for about a year to qualify for this FIRPTA withholding exception.
Suppose a seller’s nationality is unknown to you, and they provide you with a certification proving that they are an American citizen and not a foreign person. In that case, you will not be subject to FIRPTA withholding obligations. This exemption extends to real estate companies selling property to American citizens that can certify they are domestic corporations.
Instead of providing this information to you, the buyer, a seller can also give a certification stating they are not a foreign person or acting on behalf of a foreign corporation to a qualified substitute. To learn who can act as a qualified substitute and what that means for your FIRPTA withholding liability, consult an experienced US tax accountant.
In some situations, the IRS will grant a withholding certificate to American buyers purchasing property from foreign persons or corporations. You will be exempt from FIRPTA withholding requirements if the IRS grants you a withholding certificate. While you can apply for a withholding certificate, the IRS rarely grants them. To learn if you might be eligible for this specific FIRPTA withholding exception, ask a tax CPA.
Depending on the circumstances of your recent acquisition, it is possible that the IRS does not recognize the gains or losses involved. If so, a non-recognition provision can exempt you from FIRPTA withholding requirements. It is the seller’s responsibility to inform a buyer of this specific exemption. Without written notice regarding a non-recognition provision from a seller, the IRS will not consider a buyer exempt from FIRPTA withholding requirements.
Zero Financial Gain on Transfer
Suppose, after a property transfer between a foreign seller and an American buyer, the transferor realizes no financial gain. In that case, the transferee will be exempt from FIRTPA withholding requirements. If a buyer doesn’t make any money on the sale, you won’t have to withhold any funds.
In addition to the commonly cited FIRPTA withholding exemptions listed above, there are more, rarer exceptions to FIRPTA withholding requirements. For example, American persons, partnerships, or trusts that purchase publicly traded stock in a foreign company don’t have a FIRPTA withholding obligation.
There is an exemption for instances when a transferor in a transaction realizes a return on an option and not the property itself. There is also an exemption for Americans that purchase interest in a company that is not publicly traded stock or U.S. real property interest. Finally, there is a FIRPTA withholding exemption for purchases made by the American government.
FIRPTA withholding exemptions are extremely complicated and nuanced, making it difficult for many Americans to understand their liability. Be sure to consult an experienced tax CPA upon purchasing U.S. real property interest from a foreign person, so you can learn if you are eligible for any FIRPTA withholding exemptions.
How to Apply for a FIRPTA Withholding Certificate
A withholding certificate from the IRS can either reduce or eliminate a transferee’s FIRPTA withholding reporting obligation. That said, being granted such a certificate is not guaranteed. In order to improve your chances of getting a withholding certificate from the IRS, consult an experienced tax CPA.
If you wish to apply for a withholding certificate to eliminate FIRPTA withholding on disposition of U.S. real property interest, you must do so using IRS Form 8288-B. Your tax CPA can help you complete this form so that you can apply for an exemption. A transferor can also apply for a withholding certificate. If they do, they must inform a transferee in writing.
The IRS grants withholding certificates at its own discretion and generally responds to requests within 90 days. If, after evaluating the sale of property and a transferor’s net gain, the IRS believes it is appropriate to reduce or eliminate FIRPTA withholding taxes, it might. Again, the IRS grants withholding certificates on a case-by-case basis.
What Forms Do You Use to Report FIRPTA Withholding to the IRS?
As a transferee of U.S. real property interest, you must comply with any FIRPTA withholding requirements from a transaction with a foreign person or corporation. Because of that, it is important to understand which forms you must use to report FIRPTA withholding and ultimately pay any necessary taxes.
Transferees reporting and paying FIRPTA withholding taxes must use IRS Form 8288. In addition to individuals, certain corporations, partnerships, estates, and trusts are required to withhold tax on certain distributions must report such funds using IRS Form 8288. It is also a transferee’s responsibility to prepare IRS Form 8288-A for each foreign person from whom tax has been withheld.
The IRS may require you to complete additional forms, depending on the nature of a transaction and its involved parties. A tax accountant can help you understand your reporting responsibilities and complete the necessary forms properly.
What is the Deadline for Reporting FIRPTA Withholding?
Reporting FIRPTA withholding to the IRS and quickly submitting the necessary funds is crucial. The IRS takes FIRPTA withholding seriously, so transferees must abide by a very short reporting deadline.
Transferees with a FIRPTA withholding obligation must submit the necessary forms and funds to the IRS within 20 days of a disposition date. That means, less than three weeks after you purchase U.S. real property interest from a foreign person or corporation, you must complete the necessary forms, withhold the appropriate amount, and report to the IRS.
Unfortunately, 20 days does not leave transferees ample time to assess their FIRPTA withholding liability at all. That is why it’s best to hire a tax CPA as soon as you decide to purchase property from a foreign person. That way, you can prepare for the IRS’s short deadline for reporting FIRPTA withholding and easily meet it.
Consequences for Non-Compliance with FIRPTA Withholding
Transferees that fail to file IRS Form 8288 by the deadline and fail to submit necessary withholding tax can face steep financial penalties from the IRS. The IRS takes non-compliance seriously, which is why understanding your FIRPTA withholding obligation is important.
For failure to pay withholding tax and report such information to the IRS, transferees can face financial penalties. If you fail to withhold the necessary funds from a transferor’s disposition, you may be responsible for paying any owed taxes yourself, plus interest. In addition, if the IRS finds that you willfully ignored your FIRPTA withholding obligation, you can face a financial penalty of $10,000.
Avoiding penalties for non-compliance with FIRPTA is possible, especially when you have an experienced tax accountant by your side. A skilled professional can inform you of any FIRPTA withholding and reporting requirements and all necessary deadlines so that you don’t incur any unnecessary financial penalties from the IRS.
How to Comply with FIRPTA Withholding Requirements
For many Americans, the Foreign Investment in Real Property Tax Act is not easy to understand. The countless rules and caveats within FIRPTA can make it challenging for transferees to comply with withholding requirements. Instead of confusing yourself with complicated IRS procedures, turn to an experienced tax CPA for help.
When you purchase real estate or other U.S. real property interest from a foreign person, you may be shocked to learn that it is your responsibility to withhold tax under FIRPTA. That is understandable since buyers are generally not responsible for paying capital gains taxes; sellers are. When it comes to foreign-owned property in the United States, however, it’s the other way around.
Clearly, this can be a strange concept to transferees in America. The Foreign Investment in Real Property Tax Act is inherently complicated, with confusing definitions and requirements. An experienced US tax accountant will be familiar with FIRPTA and can explain how it applies to your recent purchase.
Understanding the specifics of withholding tax is not easy for many transferees. Leave it to a skilled professional to handle your FIRPTA withholding requirements so that you can focus on enjoying your recent purchase.
Speak with a U.S. Tax CPA to Discuss Your FIRPTA Withholding Questions
If you’re unsure whether FIRPTA applies to your recent purchase of U.S. real property interest from a foreign person or corporation, ask our tax CPAs for clarification. To learn more about how the tax accountants at US Tax Help can assist you, call us today at (541) 362-9127.