What is FIRPTA?

Company News

By Christina Kass

What is FIRPTA? The acronym refers to the Foreign Investment in Real Property Act of 1980 (FIRPTA). This tax law requires that any person, whether foreign or a US Citizen, pay income tax on the sale of real estate here in the United States. Citizens are subject to this tax in their regular income tax as you probably already know. But for the foreign investor, there was no way to collect this tax. FIRPTA became the mechanism that requires withholding a certain percentage of the sales price at the real estate closing in anticipation of the tax that will be due from the foreign seller.

The buyer is the party that the IRS holds responsible for fulfilling this requirement. This can be a very difficult thing for a buyer to do if they are not regularly involved in the real estate industry. Here in comes the real estate agents and title companies like Vanguard Title to help pave the way. The real estate agent needs to inform the buyer and the title company of this requirement if they are working with a foreign seller. The following is a shortened summary of the questions and answers to determine if there is a need for FIRPTA withholding. You should always refer to an attorney, tax professional or the IRS for further details.

  1. Are they a Foreign Seller? If the following is true they could be subject to the withholding.
    • Seller is a foreign individual
    • Seller is a foreign trust
    • Sellers is a foreign estate
    • Seller is a foreign partnership
    • Seller is foreign corporation
    • Buyer does not intend to occupy the property
  2. How much is the withholding for the foreign seller? The amount is determined by the percentage of the sales price and is withheld from the seller at closing
    • 15% of the sales price for non-occupied properties
    • 10% of sales price for all occupied properties between $300,001 and $1,000,000
    • 15% of sales price for all occupied properties that are $1,000,001 and up
  3. What happens next?
    • IRS FORMS 8288 and 8288A must be completed and signed by the buyer at closing and submitted with the withholding to the IRS within 20 days of the real estate closing.
    • For more information on where to direct buyers and sellers visit: https://www.irs.gov/pub/irs-pdf/p515.pdf
  4. Are there exemptions to this withholding? The seller can be exempt if the following are true:
    • The seller is a resident alien with a US green card
    • The seller is a US corporation
    • The seller is a qualified foreign pension plan
    • The buyer intends to occupy the property as their primary residence AND the sales price is $300,000 or less
    • If the seller provides a withholding exemption certificate already issued to them by the IRS.
  5. What do we need to do at closing if the seller is exempt from the withholding?
    • Completed Non-Foreign Seller Affidavit

Again, this is a brief summary of FIRPTA, if you should have further questions about the requirements, you may visit https://www.irs.gov/pub/irs-pdf/p515.pdf or contact your attorney, tax advisor or the IRS. If we can be of further assistance please contact us at 248-751-1000 and ask to speak to our attorney.