FIRPTA stands for Foreign Investment in Real Property Tax Act. It is a tax law that ensures foreign taxpayers pay income tax on their sale of US real estate.
Below is a quick explanation of how this may work and how it may impact a buyer or seller:
NOTE: ALWAYS HAVE YOUR CLIENT REFER TO A TAX ADVISOR AND TITLE PROFESSIONAL ON THIS MATTER
When a person in the US purchases a property in the US that is owned by a
foreign person, the buyer is responsible to withhold taxes from the
transaction on behalf of the seller. The buyer must then file special forms
with the IRS and remit that payment to the IRS within 20 days after
closing.
Most transactions the buyer is going to be responsible for
withholding 10% to 15% of the purchase price. This should be done at closing
through title.
The Seller will receive a copy of the forms from an accountant if used and also from the IRS
once everything is processed. The seller may or may not actually owe that
amount of tax. It’s possible that the seller will actually owe less or more
tax on the sell. The 10% to 15% withholding required is an estimate. It will be
applied to the seller’s withholding account with the IRS and the seller may
then file a tax return to claim any refund or pay any additional tax due.
So here’s what needs to happen:
Buyer/Seller will need to determine the amount of the sale subject to this tax. It’s
generally the purchase price but here is the technical definition on the
amount subject to withholding:
The sum of:
1-cash paid or to be paid (principal only)
2-FMV of other property transferred or to be transferred
3-The amount of any liabilities assumed by the buyer
Sellers’s Agent:
Needs to notify the seller of the 10% to 15% withholding requirement. You need to
verify that the seller has enough equity in the home that there will be
enough cash to withhold the 10% to 15% at closing.
Obtain a ITIN for the seller if they do not already have one.
Title:
Include the FIRPTA withholding as part of the close. These funds need to be
withheld from the transaction and made available to the buyer. The buyer
must send the funds to the IRS after closing.
Items needed For Tax Professional:
Information needed to file all forms:
-settlement statement from the close
-social security number of the buyer
-ITIN for the Seller
-contact addresses, phones numbers and emails for buyer and seller.
The most important thing immediately is to make sure the withholding amount
is correct, the seller is notified, and title has included the amount.
Then as soon as the property has closed and have the appropriate professionals
file all required irs forms (8288, 8288-A).