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:
- 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. This determination is crucial not only for individuals but also for entities, specifically mentioning ‘foreign corporation’ as an example of entities that need to assess their status under FIRPTA. - 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. - 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. It’s important to understand how ‘fair market value’ plays a role in calculating the withholding amount under FIRPTA, as it determines the amount of gain for FIRPTA withholding purposes and for calculating the withholding tax on the fair market value of property distributed to foreign shareholders of a corporation. - 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:
- 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, acting as the ‘withholding agent’ in these transactions. 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. 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. - Calculating Withholding
Determining the correct amount to withhold requires careful calculation based on the sale price and any applicable exemptions or adjustments. It’s crucial for the buyer, as the withholding agent, to accurately withhold tax, including income tax withholding under the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA), based on the sale price and any applicable exemptions. Buyers should work closely with tax professionals or legal advisors to ensure accurate withholding and timely submission to the IRS. - 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. - 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.
FIRPTA Exceptions
When dealing with FIRPTA, it’s essential to understand the specific FIRPTA exceptions that can alleviate the withholding requirement for certain transactions, especially when these transactions involve the disposition of real property interests by tax foreign persons.
Below are the key FIRPTA exceptions, which must meet specific notification requirements:
- Residential Property Exception
If the buyer acquires the property as a residence and the sales price is not more than $300,000, withholding is not required. The buyer or a family member must reside in the property for at least 50% of the days it is in use during the first two 12-month periods following the transfer, excluding vacant days. This exception only applies to individual buyers. - Publicly Traded Corporation Stock
Dispositions of interests in a domestic corporation whose stock is publicly traded are generally exempt, except for substantial amounts of non-publicly traded interests. - Certification from Domestic Corporation
If a domestic corporation certifies that the interest is not a U.S. real property interest, withholding is not required. This certification can be made if the corporation has not been a U.S. Real Property Holding Corporation (USRPHC) in the past five years, or the interest is not a U.S. real property interest by law. The certification must be dated within 30 days of the transfer. - Seller’s Certification
A foreign seller can provide a certification stating they are not a foreign person, which includes their name, U.S. taxpayer ID, and address. This certification can be given to a qualified substitute, who then informs the buyer under penalties of perjury. - IRS Withholding Certificate
If the buyer receives a withholding certificate from the IRS excusing withholding, they are not required to withhold funds. - Nonrecognition Provisions
When a seller provides written notice that no gain or loss will be recognized due to specific provisions of the Internal Revenue Code or a U.S. tax treaty, the buyer is exempt from withholding. A copy of this notice must be filed with the IRS within 20 days of the transfer. - Zero Realized Amount
No withholding is required if the seller realizes zero amount on the transfer of a U.S. real property interest. - Government Acquisition
Properties acquired by U.S. government entities, including states, possessions, political subdivisions, or the District of Columbia, are exempt from withholding. - Options on Property
Realizing an amount on granting or lapsing an option to acquire property does not require withholding, but withholding applies to the actual sale or exercise of the option. - Publicly Traded Partnership or Trust
Dispositions of interests in a publicly traded partnership or trust are exempt, except for substantial amounts of non-publicly traded interests.
Important Notes on Certifications:
- Certifications must be truthful and provided within required timelines. If false, the agent or substitute must notify the buyer or face liability.
- Agents or substitutes must ensure proper notification to avoid liability, which is limited to their compensation from the transaction.
Understanding these exceptions and ensuring compliance with FIRPTA’s requirements can greatly impact the net proceeds of a sale and the smooth execution of the transaction.
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.
Steven N. Klitzner, P.A. is a tax attorney based in Miami, Florida. He has been practicing tax law for over 40 years, and currently holds a 10.0 rating by Avvo. Mr. Klitzner was appointed to the IRS Service Advisory Council in 2021 and is... 
