It can be difficult to sell properties in the United States as a foreign investor. This article attempts to explain The Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) surrounding dispositions of U.S. real property interest by a foreign person. Learn exactly what you need to know about FIRPTA and if you should withhold FIRPTA.
FIRPTA provides that funds received from a transfer of real estate by a non-US citizen are subject to notice and withholding requirements in compliance with Section 1445 of the Internal Revenue Code. FIRPTA authorized the United States to tax foreign persons on sales of U.S. real property interests. FIRPTA requires that a buyer purchasing U.S. real property from a foreign person withhold 15% of the gross purchase price of the property. The amount withheld must be submitted within 20 days after the day of closing. Before you make any decisions on FIRPTA, it is important to speak with a knowledgeable foreign investment lawyer.
When the Seller is Considered a Foreign Person
FIRPTA regulations apply to the seller but if you are the buyer, you must find out if the transferor is a foreign person. If they are a foreign person and you fail to withhold, you may be held liable for the tax.
A foreign person is considered any individual who is not a U.S. citizen or a U.S. national. A non-resident is a person who does not have a green card or has not passed the substantial presence test.
The Substantial Presence Test allows a person to be considered a United States resident for tax purposes if they meet the test for the calendar year. To meet the requirements of this test, a person must be physically present in the United States on at least:
- 31 days during the current year
- 183 days during the 3-year period that includes the current year and the 2 years immediately before that, counting:
a. All the days present in the current year, and
b. One-third of the days present in the first year before the current year, and
c. One-sixth of the days present in the second year before the current year.
If the test above indicated the seller is not a foreign person, the buyer should obtain and file a FIRPTA affidavit from the seller, attesting to the seller’s nonforeign status. FIRPTA withholding is not required if the seller is considered a U.S. resident for tax purposes.
Exceptions to FIRPTA Withholding
Usually, the transferee/buyer is the withholding agent. However, FIRPTA withholding may not be required under the following circumstances; but, notification requirements must be met:
- The transferee acquires the property for use as a residence and the sales price is not more than $300,000. The transferee must have plans to reside at the property for at least 50% of the time is in use during each of the first two 12-month periods following the date of transfer.
- The transferor gives you a certification stating that the transferor is not a foreign person and contains the transferor’s name, U.S. taxpayer identification number, and home address. The transferor can also give the certification to a qualified substitute.
- You receive a withholding certificate from the Internal Revenue Services that excuses withholding.
According to the IRS, additional exceptions may apply. FIRPTA withholding rules are very complex and given the hazards buyers face, FIRPTA should be withheld when in doubt. You should contact a professional CPA or a licensed attorney for more information.
Seller Withholding Certification
The amount that must be withheld from the disposition of a U.S. real property interest can be adjusted following a withholding certificate issued to the IRS. The transferee, transferee’s agent, or the transferor may request a withholding certificate. These requests generally take about 90-120 days to process after the receipt of a complete application. A transferor must notify the transferee in writing that the certificate has been applied for on the day or the day prior to the transfer.
If a Withholding Certificate was applied for, required funds must be submitted within 20 days of the Withholding Certificate notice. A withholding certificate may be issued due to:
- A determination by the IRS that reduced withholding is appropriate due to:
a. The amount that would be withheld is more than the transferor’s maximum tax liability, or
b.Withholding of the reduced amount would not jeopardize the collection of the tax.
- The exemption from U.S. tax of all gain realized by the transferor, or
- An agreement for the payment of tax entered into by the transferee or transferor.
This article is not legal or tax advice. If you are in need of legal or tax advice, our experienced real estate attorneys may be able to help. Leave your contact details on our online form now to get in touch so you can make the process of buying and selling a home simultaneously go as smoothly as possible.