FIRPTA refers to the Foreign Investment in Real Property Tax Act. It was first birthed when foreigners were feared to be too much in control of properties in the US back in the early ’80s.
As time went by, the government delved deeper into the matter to ensure that domestic investors were receiving equal treatment with investors. This piece aims to inform and educate potential and existing investors on FIRPTA and withholding requirements.
More About FIRPTA
Foreigners are expected to gather as much knowledge as possible on FIRPTA to avoid disruptions when establishing their real estate business in the US. Moreover, it becomes even more crucial when FIRPTA withholding is mentioned.
FIRPTA withholding refers to the percentage deducted from the total purchase amount when buying property from a foreigner. This amount caters to the settlement of the tax that foreign investors owe the US government.
In essence, the buyer is the one tasked with the payment and collection of taxes from the foreign investor. They do this by filing form 8288 with the Internal Revenue Service (IRS). This should happen not later than 20 days after the sale of the property.
FIRPTA Withholding Requirements
First, let’s start by understanding who a foreign investor is—the US government terms a foreigner or any non-US citizen. Anyone else who fails the green card test falls under this category and is liable to FIRPTA withholding rules.
Here are some of the main requirements that every foreign investor looking to sell property in the US must know;
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Deduct Funds from the Purchase
This is what FIRPTA withholding is all about. The US Congress came together in the early 80s to address issues with foreign investors. One of them was their lack of willingness to comply with the taxing rules laid for them by the state.
FIRPTA was birthed just in time to curb this problem. It requires buyers to deduct a certain percentage of the total price from the sale. As of 2016, the standard withholding percentage for transferees was 10%.
The figures were updated to 15% as of 2022.
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Property Must Be Within the US Borders
FIRPTA withholding is operational only within the US borders. Transferees will be liable to tax penalties when they fail to follow up the withholding clause with the relevant entities. A transferor (foreigner) is only termed so when they are unverified US residents.
It also applies to foreign corporations, firms, organizations, and partnerships that aim to transfer properties to willing buyers to gain maximum profits.
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Higher Rates for Corporates
Foreign corporations, firms, and entities are expected to part with a more significant percentage. This means that residents of the US willing to purchase properties from them may be rightfully required to withhold about 35% from the sale.
However, US residents are advised to stay in touch with their accountants to avoid dire consequences. Delays in withholding taxes or collecting the wrong amount could result in heavy penalties.
Exceptions to FIRPTA Withholding Requirements
As much as the US holds such stringent tax rules and laws, there are exceptions to FIRPTA withholding requirements in some cases. Here are some of them;
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Relatively Lower Home Value
A piece of property is said to be of lower value when it falls at or under $300,000. Also, the buyer must occupy the home for 12 months for this exception to take effect.
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The Seller is a Verified US Citizen
As stated earlier, the FIRPTA Withholding policy is only for foreigners. A buyer may ask for several documents or items when conducting business with a property seller.
The Social Security Number (SSN), Driver’s License (or any other valid form of ID), or Taxpayer Identification Number (TIN) are enough to verify whether the seller is exempt from FIRPTA withholding requirements.
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Secretary of the Treasury’s Statement
A buyer will exempt a seller from FIRPTA withholding when they present a validly approved statement from the secretary of the treasury exempting them from the rule.
The report must provide information detailing the seller’s plan to pay the tax or is altogether exempt for some reason. Check for an original stamp to ensure you’re not being swindled.
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Get a Withholding Certificate
A US citizen is exempt from withholding once deemed eligible for a withholding certificate. Applying for one may not guarantee an immediate response. Worse, it may be denied since the IRS rarely issues a withholding certificate.
You may want to schedule a meeting with a licensed and accredited tax CPA to know your chances of qualifying for a withholding certificate.
Bottom Line
Very few people are familiar with the FIRPTA concept and withholding requirements. Both the buyer and the seller of Real property are expected to familiarize themselves with the nitty gritty related to this delicate topic.
Better still, the buyer is expected to run a background check on their potential seller. This highlights pertinent issues, such as whether the FIRPTA withholding requirement exceptions apply.
Thanks to the internet, all interested parties can conduct their businesses without fear of undue harassment from the US government or various law enforcement agencies.