10 FAQs about FIRPTA

FIRPTA stands for Foreign Investment in Real Property Tax Act. As the name suggests, it applies to the sale of properties by a foreign person in the USA.
 

An individual who does not have US citizenship, a green card, and does not meet the requirements set by the IRS in the presence test is considered to be a nonresident or foreign person. It is important to note that a foreign person does not necessarily mean only one individual. This term is also used to refer to a foreign organization, foreign trust, and foreign estate.  

Every individual who is paying any money to a foreign person that is subject to foreign withholding under FIRPTA is considered to be a withholding agent. In this case, the attorneys of both buyers and sellers can also be considered a withholding agent and hence, liable because they are involved in the process of negotiation and transaction. 

Under FIRPTA, the sale price that is set at the time of selling a US real property by a foreign person is subjected to FIRPTA withholding. However, other legal rules and regulations can also play a role in different situations, and other types of income payments can also be subject to withholding. For instance, if the income is earned from within the USA or it is an annual or periodical income such as rents and royalties. 

How much amount should be withheld?

It is highly recommended that you withhold when you are paying the income to a foreign person. The sale price of this transaction is subject to 15% withholding. 

Yes, there are certain situations in which FIRPTA withholding can be avoided legally. The Act makes it clear that the residential sales under $300,000 will not be subject to FIRPTA withholding if the buyer signs a FIRPTA affidavit. 

Under the FIRPTA affidavit, the buyer must make it clear that they will use the property as their residence and that the property will be occupied for at least 50% of the times for which it is being used since the date of transaction. 

There are two main circumstances in which the FIRPTA withholding can be reduced. First of all, if the property is going to be used as a residential property and the amount of the transaction is above $300,000 but less than $1 million. In such cases, the withholding is reduced to 10%. 

Secondly, the FIRPTA rate of withholding can even be reduced to $0 if the foreign person managed to get a FIRPTA withholding certificate from the IRS. However, getting this certificate is not possible in every situation. Hence, it is recommended that the buyer and seller rely on professional tax experts to get their advice throughout the process. 
 

FIRPTA is not directly applicable to single-member LLCs. The withholding rules are applicable in the same way that if an individual has real estate property and is considered to be a foreign person. Moreover, the domestic multi-member LLCs that are being run by a foreign person can also be taxed by the IRS. 

The law is clear that you must submit the FIRPTA withholding to the IRS within 20 days, along with IRS Form 8288, Tax Return, Form 8288-A. If you do not comply with these guidelines and deadlines, you can face serious penalties. 
 

Tax ID numbers are necessary when you are submitting the IRS forms along with FIRTPA withholding. These numbers act as identification numbers for both the buyer and the seller. It is possible that the foreign person might not have a US tax ID number. In such a situation, an application for ITIN (Form W-7) must be submitted along with the withholding forms. 
 

The purpose of discussing these important questions about FIRPTA withholding and FIRPTA affidavit is to help both the buyers and seller go through this process easily and quickly by having all of the important information.