The disposition of a U.S. real property interest by a foreign person (the transferor) is subject to the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) income tax withholding.
FIRPTA authorized the United States to tax foreign persons on dispositions of U.S. real property interests.
A U.S. real property interest includes sales of interests in parcels of real property as well as sales of shares in certain U.S. corporations that are considered U.S. real property holding corporations.
Persons purchasing U.S. real property interests (“transferee”) from foreign persons, certain purchasers’ agents, and settlement officers are required to withhold 15% (increased from 10% effective February 15th 2016) of the amount realized (special rules for foreign corporations).
Withholding is intended to ensure U.S. taxation of gains realized on disposition of such interests. The transferee/buyer is the withholding agent. If you are the transferee/buyer you must find out if the transferor is a foreign person. If the transferor is a foreign person and you fail to withhold, you may be held liable for the tax.
One of the most common exceptions to FIRPTA withholding is that the transferee (purchaser/buyer) is not required to withhold tax in a situation in which the purchaser/buyer purchases real estate for use as his home and the purchase price is not more than $300,000. However, buyers should be aware that while they may meet the withholding exemption they are still responsible for the seller’s tax liability, interest and penalties should the seller not file a US income tax return to report the sale and pay any relevant taxes.
For further information from the IRS website regarding tax withholding and filing exceptions visit http://www.irs.gov/Individuals/International-Taxpayers/FIRPTA-Withholding
January 2016 – Change in Withholding Rate for Closings after February 14th, 2016
The PATH Act of 2015 set into motion several tax extenders and new tax laws. One area addresses Section 324 of the act increasing the rate of FIRPTA withholding from 10% to 15%. The withholding rate of 10% still applies to the sale of property where the amount realized is $1 million or less AND the purchaser of the property signs an affidavit that the house will be used as their primary residence. The exemption from FIRPTA withholding remains where the amount realized is $300,000 or less, providing that the purchaser signs the primary residence affidavit. The provisions of Section 325 of the PATH Act of 2015 are effective for closings taking place after February 14th 2016.
Note to Non-Resident Buyers – If you purchase property from a non-resident seller and an exception to FIRPTA withholding does not apply then you must ensure that FIRPTA is satisfied as part of the closing. Check your settlement statement prior to closing where you should see 15% of the sales price withheld on the seller’s side of the settlement statement. Request a copy of the withholding certificate from the closing agent and, if withholding was calculated, request a copy of forms 8288, 8288-A and front and back of cancelled check. Retain these documents in a safe place along with your settlement statement and other closing documents.
Foreign Investment in Real Property Tax Act (FIRPTA) Withholding
U.S. Tax law requires that a non-resident alien who sells an interest in U.S. real property is subject to withholding, for tax purposes, of 15% of the gross sales price (i.e. $45,000 on a property with a sales price of $300,000). The withheld amount is required to be forwarded to the IRS, by the Closing Agent, within 20 days of the date of closing. These funds are held until the IRS is satisfied that all taxes due by the non-resident are paid. In order to apply for a refund you can either:-
File U.S. tax returns for each year that rental income was received, reporting all income and expenses; file a final U.S. tax return in the year following the year of sale, to report the sale and recover the balance of cleared funds. This process can take up to eighteen months depending on when, during the tax year, the property is sold.
File prior year tax returns (where required) plus an application for early release of cleared withholding on or before the date of closing. By making this submission, the 10% withholding remains with the Closing Agent whilst the IRS processes the Withholding Application and issues a Withholding Certificate for the cleared funds – usually around 90 days.
Please note that applying for and receiving a Withholding Certificate does not eliminate your requirement to file a final U.S. income tax return to report the sale transaction. In fact, when your final tax return is filed you may receive a further tax refund depending on the number of owners and length of time that the property was held.
In order to ensure a timely release of your funds it is extremely important that the following is obtained PRIOR to closing:-
Buyer’s names, address and SSNs – if U.S. Citizens
Buyer’s names, address and ITINs – if non residents
Or, if the buyers are non residents and do not have ITINs, the buyer’s completed Form W-7 (one per buyer) and authenticated copy of the picture page of their passport(s)
Without this information the Application for a Withholding Certificate and early refund will be rejected. We suggest that you request your Realtor prepare your sales contract contingent upon the buyers providing the above information.
How long do I wait for my FIRPTA Withholding?
I am a foreign owner selling my U.S. property. I understand that 15% of my sales price will be held back from me at closing but how long will it take for me to get back that money?
Option 1 – if you do not take any action then the 15% will be submitted to the IRS by the title company or closing agent within 20 days of closing. To claim back any overpaid withholding you must file a tax return (one per owner) the following tax year to report the sale and calculate the capital gain (if applicable) – any over payment will be refunded after the IRS has processed your tax return. If you close on your property in June 2014 then the earliest you can file your 2014 income tax return is February 2015 – you would then receive your refund around May/June 2015.
Option 2 – File an application for reduced FIRPTA withholding. The application MUST be submitted to IRS on or before the closing date and MUST include the legal names and contact information, U.S. taxpayer identification numbers or applications for all parties – sellers and buyers. The 15% stays with the title company or closing agent whilst the IRS processes the application – usually around 90 days. Once the IRS issues the withholding certificate, the title company will release the cleared funds back to the seller. Note – filing the application does not eliminate the requirement to file a US income tax return the following year to report the transaction.
TIP – remember to ensure that your U.S. bank will accept instruction from overseas to transfer your funds – many will only accept instruction when you are in the branch!!!
Who’s responsible for FIRPTA withholding on the sale of U.S. property?
Foreign Investment in Real Property Tax Act (FIRPTA) was established in 1980 to ensure the withholding of estimated amount of taxes which may be due on the gain from the disposition or transfer of a U.S. real property interest from a foreign person.
If you purchase U.S. real property from a foreign individual or corporation then you are required to make sure that the seller pays any taxes due on the property. The buyer must execute or have executed the correct forms including the sellers name, address and social security number or individual taxpayer identification number. 15% of the gross sales price must be withheld and submitted to IRS or held in escrow whilst an application for reduced FIRPTA withholding is timely filed and processed.
If the buyer does not take care of the withholding and the seller is a foreign entity who leaves without paying their tax then 15% will be taken from the buyer.
Most buyers are unaware that it is their responsibility to determine if the transferor/seller is a foreign person and subject to FIRPTA withholding. In reality, the settlement agent (Title Company or Attorney) may be instructed to deduct the 15% and submit to IRS or hold in escrow while an application for reduced FIRPTA withholding is submitted to IRS for processing.
If you have questions regarding FIRPTA, please contact our office for assistance.