What is FIRPTA?
FIRTA stands for Foreign Investment in Real Estate Act. This Act was put in place in 1980. A way to tax foreigners (those who are not legal aliens or citizens of the USA) when they sell their investments in the USA. It can be complicated and yes, there are going to be more questions raised by this post too… So, I strongly suggest you consult tax and legal counsel for specific and personal advice.
Here is how it goes…
1. You do not need a Permanent Residence Status, Green Card or TIN (Tax Id Number) to purchase real estate in the USA. Your investment and source of the funds are not reported to the IRS and there is no additional paperwork to be filled out.
2. You want to later sell your investment and your Realtor sets about creating an Estimated Sellers Net Sheet for you. (I believe in the “eyes wide open” theory. My clients get this form/info before they decide whether selling is the right thing for them, before they get pre-qualified with the idea of buying their next home, and long before they get to the closing table!) This could be the first time the Seller is made aware of this foreign tax – they are not going to be happy!
At the closing table, the Seller is required to complete and sign a FIRPTA form that states the Seller is not a “non-resident alien”. A foreign seller cannot sign this form, which tells the parties that a 10% (of sales price) FIRPTA tax must be collected and sent to the IRS within 20 days of closing. It is the BUYER who is liable for the tax, even though it’s collected from the Seller. Because the title company is taking responsibility for paying it to the IRS, it’s the title company that is liable for the late fee (25%) if the tax is not paid to the IRS on time.
A Tax Id Number is needed from the Seller, in order to properly do the withholding, so Seller, if you don’t already have one, it’s time to get one. A TIN can be obtained by submitting form W-7 (http://www.irs.gov/pub/irs-pdf/fw7.pdf to the IRS (see instructions – http://www.irs.gov/instructions/iw7/ch01.html#d0e465).
The 10% is withheld even if the seller is declaring a loss or no gain. If the 10% is more than what the Seller is making (E.G. Short Sale), they will need to bring the extra money to closing.
I know what you are thinking!
Is there any way to avoid FIRPTA tax?
(My quick summary… With strong advice to follow the link to the IRS page of FIRPTA withholding tax exemption info)
- The Transferer certifies that they are NOT a foreign person.
- If the buyer is purchasing the property as his/her primary residence and they will live there for at least 50% of the next 2 years, plus the sales price must be less than $300,000.
- The property is an interest in a US Corporation – and here it gets VERY complicated, so consult a professional about the in’s and out’s of property that is an interest in a domestic corporation!
- You receive a withholding certificate from the IRS that excuses withholding. (You’ll need a TIN and to apply for this 6 months earlier than needed.)
- The property is acquired by the United States, a state or possession (including District of Columbia).