FIRPTA Problem

Are you buying real property from a foreign person? Or are you a foreign person selling property in the United States? If so, the Foreign Investment in Real Property Act (FIRPTA) may apply to you.

What is FIRPTA?

FIRPTA, or the Foreign Investment in Real Property Act of 1980, is a United States tax law that governs the taxation of transactions involving real property owned by foreign individuals or entities. The goal of this law is straightforward: to ensure that foreign individuals or entities selling US real property pay the appropriate taxes on the income earned.

If you are subject to FIRPTA, the buyer must withhold a percentage of the sale and turn it over to the Internal Revenue Service. This is 10%, 15%, or more, depending on the sale price and certain conditions and circumstances.

Of course, whenever taxes are involved, it is complicated. There are many factors to consider and questions to answer. These include the following:

As a seller, what are your obligations under FIRPTA?

When selling property in the U.S. as a foreign individual or entity, you have specific responsibilities under FIRPTA. Here’s what you need to know:

  1. Determining Foreign Status
    Sellers must determine whether they qualify as foreign persons under FIRPTA. Even individuals who are not U.S. citizens may not necessarily be considered foreign persons for tax purposes. It’s essential for sellers to understand the criteria for foreign status and seek professional advice if uncertain.
  2. Exemptions and Exceptions
    FIRPTA provides certain exemptions and exceptions that may reduce or eliminate the withholding requirement for sellers. Sellers should explore whether any of these apply to their situation, such as exemptions for transactions below a certain threshold or for certain types of properties.
  3. Impact on Sale Proceeds
    FIRPTA withholding can significantly affect the net proceeds received by sellers from the sale of real property. Understanding the implications of withholding on their financial outcomes is crucial for sellers when planning their transactions and managing their tax liabilities.
  4. Disclosure and Documentation
    Sellers should be prepared to provide accurate information and documentation regarding their tax status and any applicable exemptions or exceptions to FIRPTA withholding. Failure to disclose relevant information could lead to delays or complications in the transaction process.

As a buyer, what are your obligations under FIRPTA?

In real estate transactions involving foreign sellers, buyers have specific responsibilities outlined by FIRPTA. Compliance with these obligations is essential to ensure a smooth transaction process and avoid potential penalties. Here are the key obligations buyers must fulfill under FIRPTA:

  1. Withholding Responsibility
    Buyers need to be aware of their obligation to withhold a portion of the sale proceeds if the seller is a foreign person under FIRPTA. This withholding amount can be significant, and failure to comply can lead to penalties. Understanding the thresholds and rates applicable to different sale prices is essential.
  2. Calculating Withholding
    Determining the correct amount to withhold requires careful calculation based on the sale price and any applicable exemptions or adjustments. Buyers should work closely with tax professionals or legal advisors to ensure accurate withholding and timely submission to the IRS.
  3. Liability for Non-Compliance
    Buyers bear the responsibility for FIRPTA compliance, including any penalties for failure to withhold or remit taxes. It’s crucial for buyers to thoroughly understand their obligations under FIRPTA and to seek guidance if uncertain.
  4. Escrow and Closing Process
    FIRPTA withholding is typically handled during the escrow and closing process of a real estate transaction. Buyers should communicate clearly with their escrow agent or closing attorney to ensure proper handling of FIRPTA-related matters and timely submission of withheld funds to the IRS.

Avoid costly complications with FIRPTA; get professional advice!

Given the complexity of FIRPTA regulations and the potential financial consequences of non-compliance, both buyers and sellers may benefit from consulting with a qualified tax attorney. At the law office of Steven N. Klitzner, our expertise in FIRPTA matters helps our clients in navigating these complexities, ensuring compliance, and optimizing tax outcomes.

It’s crucial to note that failing to adhere strictly to FIRPTA’s requirements, including meeting deadlines for tax submission, can result in substantial penalties. More importantly, the responsibility for compliance rests with the buyer, not the closing agent. Understanding your rights and obligations is paramount to navigating FIRPTA successfully.

If you find yourself grappling with a FIRPTA-related issue, don’t hesitate to reach out for assistance. For a complimentary and confidential consultation from the office of Steven Klitzner, please contact us at 305-564-9199. We’re here to help you navigate the complexities of FIRPTA and ensure a smooth real estate transaction.

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