FIRP-DUH! – Selling Real Property for Foreigners

What is FIRPTA? Say a foreign seller wants to sell their real property; well, everyone is expected to pay their fair shares of taxes, and foreigners are no exception. So the IRS established FIRPTA (Foreign Investment in Real Property Tax Act) generally requiring 15% percent of the amount realized (i.e. of the Gross Sales Price) to be withheld until the IRS figures out the foreigner’s tax liability, if any.

Who does FIRPTA apply to? FIRPTA applies to: Non-U.S. citizens; Foreign corporation, partnership, trusts, or estates; and Resident alien individuals who do not pass either the Green Card Test (lawful permanent US residents whose status is not revoked); or the “Substantial Presence Test” (physically present in the US at least 31 days during the current year, and 183 days during the 3-year period including the current year). See, IRS TOPIC 851. Single-Member LLCs are considered “Disregarded Entities” for tax purposes so if the sole member is a foreigner, then FIRPTA applies as if the foreign sole member was the seller.

Common Exceptions to FIRPTA? (1) Property is $300,000 or less and will be used as buyer’s (or their family member’s) personal residence for at least 50% of the days the property is used during each of the first two 12-month periods following the sale; (2) Seller states in an affidavit under penalty of perjury that seller is not a foreign person, and provides their U.S. taxpayer identification number, usually a social security number; (3) Seller signs a “Declaration and Notice to Complete an Exchange” (1031 Declaration and Notice), completes a simultaneous exchange (i.e. Sells/Buys a non-principal residence the same day) and receives no cash or mortgage boot (e.g. swaps debt to the replacement property or is relieved of the debt on the relinquished property); (4) IRS issues a “Withholding Certificate” after receipt of a completed Form 8288-B which should be applied for in advance to reduce waiting time. A pending application suspends the obligation to pay the withheld amount until the 20th day following the IRS determination; (5) The transfer is of an interest in a non-publicly traded domestic corporation which provides an affidavit stating that it has not been a “U.S. real property holding corporation” (i.e. a corporation whose U.S. real property interests equals ½ of all its real property interest worldwide plus all other assets during the past 5 years); and (6) The interest transferred are stock traded on an established securities market.

Be Pro-active. Individuals who do not qualify for Social Security Numbers (SSN) may obtain Individual Taxpayer Identification Numbers (ITINs). Sellers of U.S. real property interests will need a Taxpayer Identification Numbers (TIN) when they either request a Withholding Certificate, or to pay any required withholding taxes to the IRS. The IRS takes around 90 days from receipt of applications to respond. Therefore, foreign sellers should file Form 8288-B to obtain a Withholding Certificate from the IRS as soon as they enter the contract in order to reduce the IRS’ holding time of the seller’s proceeds.

How “Buyers” Report. Even though it is the seller’s taxes, the buyer must pay the withheld taxes and mail IRS forms 8288 and 8288-A, and any 8288-B with the IRS by the 20th day after the transfer.

DISCLAIMER:  Topics discussed are general concepts, not intended to constitute legal advice, accuracy, nor completeness, and may not be relied upon as such; consult an attorney or accountant.  The author Randy Gilbert, J.D. is neither an attorney nor an accountant.  FTIC is a national award winning title insurance company known for its white glove customer service and “No Junk Fee Guarantee.” ®