What is FIRPTA?

FIRPTA stands for Foreign Investment in Real Property Tax Act and it is the Federal law governing the taxation & withholding by foreign persons selling US real estate. 

Under FIRPTA, the buyer is required to withhold either 10% or 15% of the gross sales price from proceeds as a “deposit” due to IRS within 20 days after closing; when purchasing from a foreign seller (certain exceptions apply).

New for February 16, 2016 – If the total sale is more than $1,000,000 OR the property is not being acquired as a residence, the buyer is required to withhold 15% of the gross sales price. 

A “foreign person” is defined under FIRPTA as a:

• • • nonresident alien individual,
    • foreign corporation,
    • partnership,
    • trust or
    • foreign estate.

How to Avoid FIRPTA?

Affidavit can be executed by an “eligible” buyer.

Withholding Certificate may allow lesser amount withheld at closing.

FIRPTA Exemptions

No withholding required under FIRPTA if:

• The sales price is $300,000 or less, and
• The buyer signs affidavit at or before closing stating they intend to use property for personal purposes for at least 50% of time property occupied for the each of the first two 12 month periods immediately after closing.

FIRPTA WITHHOLDING CERTIFICATE

According to IRS.gov, the withholding amount on the sale of US property can be adjusted if the IRS issues a withholding certificate. A withholding certificate is an application for a reduced withholding based on the gain of a sale instead of the selling price.

If 15% of the selling price is more than the tax you will owe on this sale, then a withholding certificate may be ideal for you.

Important features to know about withholding certificate applications:

• • • If the withholding certificate can’t be applied for and issued prior to closing, then typically the buyer gets to decide if the funds need to be remitted within 20 days of the closing or if they can remain in escrow pending the approval or rejection of the application.
    • The IRS will generally act on these requests within 90 days after receipt of a complete application
    • All parties must have or at least apply for a US tax ID for a withholding certificate
    • The applicant must be able to prove their basis in the property
    • The transferee, the transferee’s agent, or the transferor may request a withholding certificate.
    • A transferor that applies for a withholding certificate must notify the transferee in writing that the certificate has been applied for on the day of or the day prior to the transfer.

Let us help you start your application today!

Madison Fund Service, Ltd. specializes in ITIN applications, Withholding Certificate applications, and tax returns to claim your refund! Call us at 914-220-5497