Foreign Investment in Real Property Tax Act (FIRPTA)
The disposition of United States Real Property by a foreign person is subject to the FIRPTA income tax withholding. The rate of withholding generally is 15%. The withholding takes place at the closing, and the escrow officer or settlement agent remits the funds to the IRS, who has strict timeline for remitting the taxes withheld. We have extensive knowledge in navigating the requirement of FIRPTA and has helped foreign investors with countless real estate transactions subject to FIRPTA in Arizona and nationally.
Q: Does the seller owe this much in taxes?
A: Not necessarily. The withholding is a payment towards the tax obligation the foreign person or entity may have. Through the FIRPTA process, the seller can apply for a withholding certificate that could reduce the withholding. Even if the seller is going to owe some taxes, they may be able to deduct closing costs, improvements they made on the property and other deductions when they file the request for the Withholding Certificate with the IRS. This allows foreign sellers to get a pre-determination either that they owe nothing, so no withholding will take place, or at least get that amount reduced.
Q: How long does it take to get a Withholding Certificate?
A: The process can take at least 90 days. Therefore, it is important for the seller to file the request for the Withholding Certificate with the IRS as soon as possible. If application for withholding certificate or reduced withholding are not filed on time or completed with all required elements, then they may be denied. NOTE: the seller must have an Individual Tax Identification Number (ITIN) when applying for the exemption, and that process itself may require some time to complete. World Tax is a Certifying Acceptance Agent, pursuant to a written agreement with the IRS, is not only authorized to assist a foreign person in obtaining ITINs, but also can verify original documentations such as passports.
Q: The FIRPTA withholding was paid at close of escrow, but not that much was due to the IRS. How does the seller get their money back?
A: Under FIRPTA there is no automatic exemption from withholding if the seller is taking a loss or no gain. If a foreign seller feels they are exempt from FIRPTA withholding because there is no gain on the sale, they need to consult with a tax expert who can help them to apply for a withholding certificate from the IRS that will grant them the exemption on the transaction using IRS Form 8288-B. If this is the case, this should occur early in the transaction. We encourage foreign sellers and their realtors to consult with a tax expert early on in the selling process (preferably as soon as the seller list the property for sale).
Q: A foreign seller only owns a portion of the property. How much does the foreign seller owe?
A: The foreign seller will owe withholding on their percentage of the ownership of the property.
Q: The property is under $300,000 and the buyer is going to live in it. Doesn’t that automatically exempt it from withholding?
A: The buyer must agree to sign an affidavit stating that the purchase price is under $300,000 and the buyer intends to occupy. They buyer may choose not to sign the form, in which case withholding must be done.
Q: How can World Tax help?
A: We can help foreign seller get the most beneficial tax treatment for his or her individual situation. In addition, we can apply for reduced withholding or withholding exemption certificate by filing withholding documents and calculate the required withholding amount. We can assist foreign persons in obtaining ITINs. Contact us today.