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 New York foreign investment lawyer. A skilled foreign investment lawyer could help you in identifying properties that are available to foreign investors and addressing any challenges that might arise due to foreign ownership.
What is FIRPTA?
The Foreign Investment Real Property Tax Act (FIRPTA) is a US law that enforces a withholding tax on US real property interest sales made by foreign sellers. FIRPTA allows the US to levy taxes on foreign individuals who dispose of US real property interests, such as selling interests in parcels of real estate and shares in particular US corporations regarded as US real property holding corporations.
The goal of FIRPTA is to ensure that foreign investors pay taxes on profits earned from the sale of US real estate properties, addressing concerns that they were buying US real estate and selling it without paying taxes to the United States. FIRPTA requires a withholding tax of 15% on the gross proceeds of a foreign seller’s real estate property sale.
When purchasing US real property interests from foreign sellers, certain purchasers’ agents and settlement officers must withhold 10% of the amount realized (with specific rules for foreign corporations). This withholding is intended to ensure US taxation of gains realized on the disposition of such interests. The transferee, or buyer, is the withholding agent and is responsible for ensuring that the transferor is not a foreign individual. Failure to withhold may result in the transferee being responsible for the tax liability.
When a US corporation or partnership sells a US real estate asset, the entity itself acts as the withholding agent. In some cases, a foreign seller may be able to receive all proceeds from the sale of the property after filing the appropriate taxes.
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.
Preparing Tax IDs Before NY Home Sale Closing
When closing on a home sale in New York, foreign sellers must ensure they have the necessary tax identification numbers (TINs) well in advance. For individuals, this could be a Social Security Number (SSN) or an Individual Taxpayer Identification Number (ITIN). Entities require an Employer Identification Number (EIN). It’s crucial to note that if you are a foreign seller who has not kept up with FIRPTA requirements or let your ITIN expire, you could face delays or denials in your withholding certificate application.
Here’s what you need to know:
- SSN Use: If you already have an SSN, use it. SSNs don’t expire, even if you temporarily worked in the U.S.
- ITIN Renewal: If you have an ITIN that hasn’t been used recently, it may have expired. You’ll need to reapply for a new one.
- New ITIN or EIN: If you’ve never had an ITIN or SSN, you must apply for one. The application requires a certified copy of your passport, which can be obtained through an IRS Accredited Acceptance Agent or at a U.S. consulate. For entities, obtaining an EIN is typically quicker and can be completed via phone.
Allow ample time to gather documents and secure certified copies of passports, if necessary. Non-compliance with FIRPTA or failure to provide the IRS with the required evidence of your tax status can lead to a rejected 8288-B application, and this decision by the IRS is final. Be proactive to ensure a smooth sale process.
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.
| Exceptions to FIRPTA Withholding | Requirements |
|---|---|
| Property acquired for use as a residence | Sales price not exceeding $300,000. Intention to reside at the property for at least 50% of the time during the first two 12-month periods following the transfer. |
| Certification from the transferor | Certification stating the transferor is not a foreign person. Includes transferor’s name, U.S. taxpayer identification number, and home address. Can also be given to a qualified substitute. |
| Withholding certificate from the IRS | Issued by the Internal Revenue Service (IRS) excusing withholding. |
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 gains 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.
