In the United States, if you are a domestic citizen, you will be required to pay capital gains taxes on certain items, including the sale of real estate. But a foreign individual who does not pay federal taxes in the U.S. is not taxed for these often significant capital gains on real estate sales. Consequently, the federal government put FIRPTA, or the Foreign Investment on Real Property Tax Act, into place to collect taxes from foreigners who sell real property in the United States.
With the vast amount of foreign investment in New York City today, understanding FIRPTA requirements have become very important. Any foreign seller or individual purchasing real estate from a foreign person should understand their responsibilities under FIRPTA. While many real estate agents don’t fully understand the implications of FIRPTA obligations, it is critical to get the guidance of a New York City real estate attorney who understands and has experience with foreign investment and IRS laws as they pertain to it.
Before the Foreign Investment on Real Property Tax Act
Before FIRPTA was enacted in 1980, foreign sellers were not subject to any taxes for capital gains upon the sale of U.S. real property. But this was viewed as a competitive advantage to foreign investors who owned property here.
Congress removed that perceived advantage by requiring that foreigners pay a tax based on the gross amount realized by a foreign seller of domestic real estate. Under Section 897 of the Internal Revenue Code, any sale of a domestic property interest by a foreign individual is now connected to laws regarding the conduct of a trade or business, converting the income from the sale as taxable income.
What Are the Responsibilities of Buyers and Sellers in These Types of Transactions?
To ensure that this tax is collected, a buyer purchasing a property from a foreign individual is required to withhold a percentage of the purchase price of the property. This will be held by the IRS to offset any taxes owed on the sale. The seller will receive a refund if taxes are calculated as less than the amount withheld.
There are different withholding rates based on the sales price of the property.
- If the sales price of the property is less than $300,000, FIRPTA may not be applicable. In this case, the buyer must certify that the property will be used as a residence for more than 50% of the first two years after the sale.
- If the sales price of the property is $300,000 to $1 million, FIRPTA taxes must be withheld at a rate of 10% of the amount realized.
- If the sales price of the property is over $1 million, FIRPTA taxes must be withheld at a rate of 15% of the amount realized.
Within twenty days after the purchase of the property, the buyer of the property is required to file Form 8288 with the Internal Revenue Service with the amount withheld from the seller. Penalties for non-compliance can be significant.
Exceptions Regarding FIRPTA
There are instances where the amount withheld can be reduced or eliminated altogether. If you are a foreign individual who is selling a piece of domestic real estate or a buyer who is purchasing from a foreign seller, you should understand your obligations and options as they apply to FIRPTA.
At Sishodia PLLC, our highly experienced team of New York City real estate attorneys can help you navigate FIRPTA or any other issues concerning your real estate transaction. Call us at (833) 616-4646 or schedule an initial consultation with us via our online contact form.