Short Update and Explanation of FIRPTA Tax Withholding
Updated: Jun 9
FIRPTA (Foreign Investment in Real Property Tax Act) will change a little this year. The law was first introduced in 1980. It was a way to limit the number of foreign real property owners selling up and realizing a gain or transferring property at an increased market value, but not declaring or paying capital gains tax. The law was introduced so that a foreign person or other foreign entity, like a business, which sells or transfers real property, can be held accountable for their Federal taxes. It has often caused some confusion, so you may find it helpful if we briefly explain the law, and the changes.
FIRPTA requires that, in some cases, a proportion of the property’s value is withheld, rather than distributed at closing. The foreign entity must satisfy the IRS that they do not owe tax – if only because they pay it out of the amount that’s withheld – and then any surplus is released. The surplus could, of course, be the entire amount if all Federal taxes are up to date. It seems a little complicated unless you are familiar with the regulations. But, in a nutshell, FIRPTA works like this.
The person who buys or otherwise receives title to the property becomes the withholding agent, and is responsible until the IRS declares that all is well on the tax front. The buyer, initially therefore, becomes responsible for any liability until then. The way it works in practice, though, is that the closing agent holds the amount back. The amount stays in escrow until it is either forwarded to the IRS or released to the previous owner. The owner should engage an IRS-approved CPA to handle this for them. On February 16 2016, the withholding percentage, on some transactions, goes from 10% of the proceeds to 15%. In essence the process works like this:-
If the sale price or the transfer value, is $300,000 or less, nothing in the law changes
If the buyer states that they will use the property as a residence, as defined, nothing is withheld but if the buyer cannot say that, 10% of the value is withheld
The buyer is liable, regardless, as the withholding agent, though
Buyers who are involved in a sale by a foreign national should seek professional advice to learn about their liabilities on this matter
If the sale price is between $300,001 and $1 million the withholding amount stays at 10% as long as the buyer states they will use the property as a residence
The buyer is still considered by the IRS to be the withholding agent
If the sale price, or transfer value is more than $1 million, then the withholding amount rises to 15% without exception
The buyer is still considered to be the withholding agent
If you are involved in a transaction with a foreign owner, you should seek legal advice, so you know how to proceed confidently. If you have a contract in place, your adviser will be able to tell you whether you need to add a simple amendment to the contract. Amendments are common and straightforward. There is no reason to avoid buying from a foreign owner, just so long as the contract says what you want it to.
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