everything you need to know ABOUT FIRPTA IN THE US

Do you know what information you need to have when you conduct a real estate purchase and sale transaction involving a foreign person in the United States?

People from all over the world invest in real estate in the United States, and so if you are buying a property from a foreign owner, here are some things you need to know. The Foreign Investment in Real Property Tax Act of 1980, known as FIRPTA (Foreign Investment in Real Property Tax Act) may apply to your purchase. FIRPTA is a tax law that imposes income tax withholding on foreigners who sell real estate here in the US.

From FIRPTA, two scenarios arise, the first is when the seller requests from the IRS a Certificate of Reduction or Exemption of the Amount to be withheld, demonstrating that he will have a loss or that the capital gain will be much lower without the need to withhold the 10% or 15% rate as the case may be. Once this process is prepared, the IRS will issue a decision within 90 days, and if it is Exempt, the buyer will simply not withhold the amount and will pay the seller in full. On the other hand, if the IRS does not approve, or approves a reduced amount, the buyer will proceed as explained below.

The second scenario and according to the FIRPTA regulations, the obligation to withhold up to 15% of the transaction value lies with the buyer, so for example if the transaction of purchase and sale of the property is $500,000 the buyer when transferring that resource to pay the seller must withhold $75,000 (15%) paying only the net of $425,000 to the seller and collecting this difference of $75,000 to the IRS within 20 days of signing the contract, or receiving the decision of the IRS as explained in the previous paragraph, through Form 8288, also issuing Form 8288-A and B to the seller as proof of the withholding.

In fact, it is extremely important to know the FIRPTA regulations, because in case you as a buyer do not withhold or do not follow the procedures required by law, the IRS may require you to pay the amount of tax not withheld yourself, as well as apply fines and interest.

The retention value can vary according to the following criteria:

• 0% withholding for Properties under $300,000 (three hundred thousand dollars) purchased by an individual who intends to reside in the property.
• 10% withholding for Real Estate above $$300,000 (three hundred thousand dollars) and $$1,000,000 (one million dollars) purchased by an individual who intends to reside in the property.
• 15% retention in all other cases.

Finally, on the Seller's side, taking into account that there was withholding and that the buyer has completed the fulfillment of all requirements of the FIRPTA regulations, the IRS will send to the foreign seller's address the Form 8288-A stamped and with instructions for the Seller to declare the Income Tax in order to calculate the capital gain and be able to offset the tax already withheld. In most cases, if the seller has not requested the reduction or exemption certificate from the IRS, he/she will be entitled to a total or partial refund of the amount withheld, since at the time of the declaration he/she will be able to deduct both the acquisition cost of the property sold and the costs incurred in closing the contract, commissions, fees, and others.

Need help complying with your FIRPTA obligations? Contact us today and we will help you.