Did you know that $59 billion, or 2.6% of all real estate transactions were by foreign persons? If you are a business owner who is looking to invest in property in the United States, then you need to know about FIRPTA. The Foreign Investment in Real Property Tax Act is a law enacted by the United States government to tax foreign investors for their involvement in U.S. real estate investments. In this blog post, we will discuss questions like “What is FIRPTA?” and how it affects foreign investors. We will also provide tips on how to reduce your taxes under FIRPTA.
What Is FIRPTA?
The Foreign Investment in Real Property Tax Act (FIRPTA) is a federal law enacted in 1980. The law imposes taxes on the sale of real property by foreign nationals. FIRPTA is to ensure that foreign investors who profit from the sale of U.S. real estate pay their fair share of taxes.
The law requires that buyers withhold a portion of the purchase price when they buy real estate from a foreign seller, and remit the funds to the IRS.
If the buyer does not withhold the required amount, they may be liable for the full amount of the tax. FIRPTA also requires sellers to disclose their status as foreign nationals when they sell real estate and to obtain a certification from the IRS confirming that they have complied with the law.
Foreign investors who do not comply with FIRPTA can face significant penalties, including fines and jail time.
When Does FIRPTA Apply?
Under FIRPTA, any time a foreign person or entity sells or disposes of a U.S. real estate property, they are required to pay taxes on any capital gains earned from the sale.
Additionally, if a foreign person dies and owns a U.S. real estate property at the time of their death, their heirs may be subject to FIRPTA tax liabilities. To avoid liability under FIRPTA, foreign investors must obtain a withholding certificate from the IRS prior to the sale or transfer of any U.S. real estate property.
FIRPTA as a Buyer
The Foreign Investment in Real Property Tax Act is a taxation law that requires buyers of U.S. real estate to withhold and remit taxes to the IRS. The withholding amount is equal to 15% of the sales price. FIRPTA applies to both foreign individuals and entities.
As a buyer, you are responsible for ensuring that the taxes are withheld and remitted to the IRS. If you fail to do so, you may be subject to interest and penalties. Withholding and remitting taxes under FIRPTA are typically handled by the escrow company or closing agent.
If you are a foreign person or entity purchasing U.S. real estate, it is important to be aware of your tax obligations under FIRPTA. Working with a qualified tax advisor can help ensure that you are in compliance with all applicable laws.
FIRPTA as a Seller
If you are selling a U.S. real estate property, you may be subject to the Foreign Investment in Real Property Tax Act. This law requires non-U.S. sellers to withhold 10% of the sales price of the property and remit it to the IRS.
In some cases, the buyer may be required to withhold additional amounts. FIRPTA applies to both residential and commercial properties, as well as undeveloped land.
If you are selling a property that is subject to FIRPTA, you will need to obtain a withholding certificate from the IRS before closing on the sale. This certificate will specify the amount of money that must be withheld from the sale proceeds.
FIRPTA as a Realtor
As a Realtor, you may come across properties owned by foreigners. When this happens, you need to be aware of FIRPTA. FIRPTA is a set of regulations that apply to the sale of real estate by foreigners.
The purpose of FIRPTA is to collect taxes on the sale of real property by foreigners. As a Realtor, you are responsible for withholding 10% of the sale price of the property and remitting it to the IRS.
In addition, you will need to provide the buyer with a disclosure statement indicating that the property is subject to FIRPTA. Failure to comply with FIRPTA can result in severe penalties, so it is important that you be familiar with the requirements before listing or selling a property owned by a foreigner.
FIRPTA Explained: Forms and Withholding
The Foreign Investment in Real Property Tax Act is a U.S. tax law that requires foreigners who sell U.S. real estate to pay taxes on their capital gains. Capital gains are the profit you make when you sell an asset for more than you paid for it. FIRPTA withholding is the amount of money that must be withheld from the sale price of the property and paid to the IRS.
The withholding is calculated as 10% of the sales price but may be reduced if the buyer provides a certified copy of their passport or other proof of citizenship. The purpose of FIRPTA withholding is to ensure that foreigners pay their capital gains taxes when they sell U.S. real estate.
To claim a refund of any withheld amount, the foreigner must file a U.S. tax return.
Capital Gains vs. Sales Price: What’s the Difference
If you’re a foreigner selling U.S. real estate, you may be wondering what the difference is between your capital gains and the sales price of your property. In order to understand this, it’s first important to know that the Internal Revenue Service (IRS) taxes the sale of U.S. real estate differently than it does other types of assets, such as stocks or bonds.
When you sell stocks or bonds, you’re taxed on the difference between your purchase price and your selling price – this is known as your “capital gains.”
However, when you sell U.S. real estate, you’re generally taxed on the entire sales price of your property – regardless of how much it has increased in value since you purchased it. This is because the IRS considers U.S. real estate to be a “depreciable asset.”
As a result, when you sell your property, you’re required to pay what’s known as a “depreciation recapture tax” – which is essentially a tax on your capital gains. In addition, if you’re a foreigner selling U.S. real estate, you’re also subject to something called the Foreign Investment in Real Property Tax Act (FIRPTA).
To sum up, if you’re a foreigner selling U.S. real estate, you’ll be taxed on the entire sales price of your property – regardless of how much it has increased in value since you purchased it.
FIRPTA Tips: Exemptions and Reductions
If you are a foreigner selling U.S. real estate, you may be subject to FIRPTA withholding. However, there are certain exemptions and reductions that may apply in your case.
For example, if you sell your primary residence, you may be exempt from FIRPTA withholding.
Additionally, if you sell commercial real estate, you may be eligible for a reduced withholding rate. If you are unsure whether or not you are subject to FIRPTA, we recommend that you consult with a qualified tax advisor.
Resident Alien vs. Foreign Person: The Difference
A “foreign person” for FIRPTA purposes includes both foreign individuals and foreign corporations. In contrast, a “resident alien” is an individual who is lawfully present in the United States and has been issued a green card or who meets the substantial presence test.
For FIRPTA purposes, a resident alien is not treated as a foreign person. This means that if you are a resident alien and you sell U.S. real property, you will not be subject to FIRPTA. However, if you are a foreign person and you sell U.S. real property, you will be subject to FIRPTA.
Therefore, it is important to know whether you are a foreign person or a resident alien for FIRPTA purposes before selling any U.S. real property.
Who Is a Resident Alien?
FIRPTA withholding may not be required even if the seller does not have a green card, so long as they meet the substantial presence test.
The substantial presence test is met if the seller has been physically present in the United States for at least 31 days in the current year, and 183 days over a 3-year period (counting all days of presence in the current year, 1/3 of the days of presence in the first year before the current year, and 1/6 of the days of presence in the second year before the current year).
If the seller meets this test, FIRPTA withholding will no longer be required as they are a resident alien instead of a foreign person.
Buying from a Foreign Person: What to Know
If you are buying a house from a foreign person, you will need to withhold 10% of the purchase price and remit it to the IRS.
You can do this by filing Form 8288 with the IRS.
Additionally, you will need to file Form 8288-A with the IRS if the foreign person does not provide you with their social security number or tax identification number.
Commercial vs. Residental Purchases: FIRPTA Differences
FIRPTA applies to both commercial and residential properties, but there are some key differences between the two types of transactions. For commercial properties, FIRPTA requires that the buyer withhold 3% of the purchase price and remit it to the IRS.
The withholding can be reduced to 2% if the property is being used for business purposes. For residential properties, FIRPTA requires that the buyer withhold 10% of the purchase price and remit it to the IRS. In both cases, FIRPTA withholding is in addition to any other taxes that may be due on the sale.
FIRPTA protects the U.S. tax base by ensuring that foreign nationals pay their fair share of taxes on the sale of real estate.
However, FIRPTA withholding can create problems for buyers who are unaware of the regulations. In some cases, buyers have been unable to obtain financing because their loan amount was reduced by the FIRPTA withholding.
As a result, it is important for potential buyers to be aware of FIRPTA regulations before they enter into a contract to purchase real estate.
Tips for Filing FIRPTA
If you are planning to sell property in the United States, it is important to be familiar with FIRPTA and comply with its requirements.
One of the most important things to keep in mind is that you must file FIRPTA paperwork on time. If you miss the deadline, you may be subject to penalties.
Similarly, it is important to use a specialized tax specialist when filing FIRPTA paperwork. This will ensure that all of the required information is included and that your taxes are calculated correctly.
Finally, it is always a good idea to plan ahead when selling US real estate. By understanding FIRPTA requirements and preparing in advance, you can help ensure a smooth and successful transaction.
International Tax Consultants: Understanding FIRPTA
FIRPTA is a complex tax law, and it can be difficult to know where to turn for help. However, by working with a qualified tax consultant, you can ensure that you complete your FIRPTA filings correctly and in a timely manner
A good tax consultant will have experience with FIRPTA and will be able to answer any questions you may have. In addition, a tax consultant can help you to take advantage of any deductions or credits.
By getting the right help, you can make sure that your FIRPTA filings are handled correctly and avoid any penalties or interest charges.
Why Choose International Tax Consultants?
When it comes to complex tax laws like FIRPTA, it is important to work with a qualified professional. International Tax Consultants has years of experience helping clients comply with FIRPTA and other international tax laws.
We are familiar with the latest changes to the law and can help you take advantage of any deductions or credits. In addition, we can help you file your FIRPTA paperwork in a timely and accurate manner.
If you are selling or buying US real estate, we can help.
Get Started With this FIRPTA Guide
What is FIRPTA? There is a lot to know. However, by working with a qualified tax consultant, you can ensure that your filings are completed correctly and in a timely manner.
Get in touch with us today to learn more about how we can help you with FIRPTA.