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Exceptions From FIRPTA Withholding

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What is FIRPTA?

In order to understand the exceptions from FIRPTA Withholding, a taxpayer must have a clear understanding of the term itself and what it stands for.

FIRPTA is a tax law in the United States of America and stands for ‘Foreign Investment in Real Property Tax Act’. It states that all foreign people who have recently disposed off or in the process of disposing of U.S. property interest are subjected to pay income taxes. Generally, this tax is implemented on a fixed rate based on what category the taxpayer is in and the amount of the gains recognized. The law was passed back in the 1980s and is the subtitle C of title XI of the Omnibus Reconciliation Act of 1980.

If you need assistance with a FIRPTA Withholding Certificate please call us 407-344-1012, or email us at info@freedomtaxfl.com

According to the tax law, it is mandatory on the purchaser to withhold a fixed 15% from the seller on the total sale price of the property when buying real estate in the U.S. The deposit received from the seller must then be paid to the IRS within the first 20 days after the date of the transfer (closing of the transaction) given that the sale price or gains realized on the property are more than $300,000 but less than $1,000,000. However, a few exceptions from FIRPTA withholding can be claimed if a certification has been issued by the IRS that the withholding be lowered from 10% on the advance of the sales.

According to the tax law, it is considered mandatory for all foreign people who are disposing of real estate in U.S but if the property owner (seller) is entitled to receive a U.S. real estate property interest in a non-exchangeable certified recognition, then the provision in the law that states that the gains recognized may not be applicable in such a case. So, how can one know how the FIRPTA label as a foreign person? Here is how a foreign person is labeled under the FIRPTA:

  • A partnership
  • A non-resident alien individual
  • A foreign estate
  • A trust
  • A foreign corporation or company

History

Before we move on to learn about the exceptions from FIRPTA Withholding, we need to understand where it truly stemmed from. Until 1981, people who were termed as foreigners (such as non-residents or non-US citizens or corporations that weren’t US-based) didn’t have to pay taxes for any sale made on US property. It meant they were exempted to pay any taxes and therefore, enjoyed the feasibility to reap all the profits made from the sales without giving the government any share from it. This obliviously wasn’t bringing any revenues in return and therefore, after 1982, the congress passed the law that all foreigners or non-residents were to pay taxes like US-based citizens whenever they disposed off a real estate property interest. The law stated that its content outmoded any prior provisions that declared otherwise.

What kinds of properties are subjected to FIRPTA?

In order to understand exceptions from FIRPTA Withholdings, one needs to understand what the different types of properties are that are subjected to it. As mentioned above, there was a time when foreigners enjoyed exceptions from FIRPTA withholding but not anymore! Today, foreigners too, like US residents, are subjected to pay taxes on the profits earned from the disposition of US property interests. According to new laws, there are 3 different kinds of properties that are subjected to FIRPTA and can no longer enjoy exceptions from the FIRPTA withholdings.

  • Real Property:

Real property can include everything from buildings, improvements on lands and land, of course. In order to determine if the property is real or not, it is decided by the laid concepts under tax laws for US and not the state laws. For instance, gas pumps or stations are not considered a real property in the eyes of federal law but do fall under the realty category as per the state laws. When trying to detail the exceptions from FIRPTA withholdings, one must understand what FIRPTA categorizes properties that are real or not. In FIRPTA, laws slightly differ. According to it, real property inculcates any personal property that is associated with the utilization of real property and the unscathed natural resources on the land such as gas, uncut timber, unharnessed crops and underground oil.

  • Interest: Like any simple fee ownership, a property tax can be defined as a direct equity on the property. Other than that, there are many additional interests on the creditor. So, when the property is owned by multiple shareholders, each of them have an individual share, which is not true in the case of a bank or a corporation that has provided the funds or mortgage.
  • United States Real Property Interest (USRPI): At a given date, the S. real estate holding corporation (USRPHC) has 50% of FIRPTA’s assets. It is liable to the FIRPTA to dispose of USRPHC’s interest as well as withholding but if it is an income tax, the corporation is free from any liabilities. The plus point of such a selling directly owned by the USRPI is liable to pay two different kinds of taxes; lower capital gains of the federal government and the state’s income tax.

If you need assistance with a FIRPTA Withholding Certificate please call us 407-344-1012, or email us at info@freedomtaxfl.com

Rates of Withholding

When speaking about the exceptions from FIRPTA withholdings, it is crucial to know that the current rates of withholdings have been risen from a 10% to 15% as of 17th February 2016. It was generally 10% for dispositions but now, it has been increased to 15% after February 2016.

Today, the amount realized is the accumulation of;

  • The (principal) amount of cash paid or to be paid.
  • The justifiable market value of the property to be transferred, and
  • Amount of any liabilities assumed by the seller or transferee or to which the property is subjected to before and after of the transfer.
  • If the transferable property was mutually owned by the government and foreign people, the amount distributed among transferors is decided by the capital contribution made by each transferor made
  • Any foreign corporation that distributes or transfers a US real property interest is entitled to withhold 35% tax off the gain it earned on the division to its shareholders.
  • A domestic corporation is entitled to withhold tax based on the fair market value of the property transferred to a foreign shareholder if;
  • The interest the shareholder has in the corporation is a US real property interest and,
  • The property transferred or distributed is either in liquidation or redemption of the corporation.

Exceptions from FIRPTA Withholding

Now that we have established an understanding about FIRPTA withholding and what they are, it is time we list down all the exceptions from FIRPTA withholdings. The situations mentioned below don’t necessarily require you to withhold; however, in case they have to be, certain notification requirements must be fulfilled. These include;

  1. The transferee (you) are using the property for residential purposes and the sale price (amount realized) is less than $300,000. Any member of your family or yourself must agree to reside at the property for at least 50% of the days the property is being availed by any person during each of the first 12-months subsequent to the transfer date. When listing the final count, don’t count the number of days that the property remained vacant; rather, only count the days it was in use. In case of such an exception from FIRPTA withholdings, the seller or transferee must be an individual.
  2. Property that has been disposed off enjoys an interest in a domestic corporation whose stocks are traded regularly in an established securities market. However, this exception from FIRPTA withholding doesn’t apply to many dispositions of considerable amounts of non-publicly traded interests in openly-traded corporations.
  3. The nature is of an interest in a local corporation who provides you a certification stating under the perjury penalties that the disposition of the interest is a non U.S real property interest. But under most circumstances, the corporation can only provide this certification if either of the next is true;
  • The corporation wasn’t a USRPHC during the last 5 years (or less in case the interest period was held by its present owner).
  • According to the section 897(c) (1) (B) of the Code, the interest in the corporation is not a U.S. real property interest as of the date of disposition. To make this exception from FIRPTA withholding, the certification mustn’t be dated over 30 days before the transfer date.
  • You receive a certification from the transferor that states that under the penalties of perjury, the seller is not a foreign person and bears his name, U.S taxpayer Identification Number and office or home address in case of entity.
  • The transferor has the right to give the certification to a qualified substitute. He, in return, will give you a statement that clearly states that under penalties of perjury, the certification is one under his possession (qualified substitute). A qualified substitute for this purpose is someone who (a) the person given the task to close the deal or transaction other than the agent, and (b) the transferee’s agent.
  • You have received a withholding certificate issued by the Internal Revenue Service (IRS) that requests withholding.
  • You are given a written notice by the transferor saying no recognition about any loses or gains upon transfer is deemed necessary because of the non-recognition provision in the IRS Code or due to any provision in the US tax treaty. In such a case, you must file a copy of the written notice received within the first 20 days after the transfer was made with the Ogden Service Center, P.O. Box 409101, Ogden, UT 84409.
  • The sale price the transferor realizes upon the transfer equal to zero of a US real property interest.
  • The property in question is obtained by the US state, possession district of Columbia, a political subdivision or by the United States of America.
  • The one who is granting (grantor) realizes an amount of lapse or grant of an option in order to obtain a US real estate property interest. But in order to do so, you must hold back onto the sale, exercising or exchange of that option.
  • The deposition is of an interest in an openly traded trust or partnership. On the other hand, this exception from FIRPTA withholding will not be applied on all dispositions of considerable amounts of non-publically traded interests in openly traded trusts or partnerships.

Only under these 13 conditions can a transferee or a transferor file for exceptions from FIRPTA withholdings.

If you need assistance with a FIRPTA Withholding Certificate please call us 407-344-1012, or email us at info@freedomtaxfl.com

Legal Responsibilities of Agent or a Qualified Substitute

if you have received a certification discussed in the 3rd or 4th item of the exceptions from FIRPTA Withholdings list and you tell your agent or substitute that the statement is false or the corporation isn’t a US based corporation but a foreign corporation, it is the duty of the agent or the substitute to notify you about the repercussions or else he will be the one held liable to pay the taxes. His liability is limited to his compensation from the transaction he has been promised from the deal.

An agent or qualified substitute is basically a representative of the transferee or the transferor who helps negotiate and close the deal smoothly between the two parties. He/she looks after all the transactions already settled or to be settled between the buyer and the seller. A person who only performs any one or more of the following duties and not all can’t be called an agent or representative. Listed below are all the duties he/she is entitled to perform in order to quality as an agent for either one of the parties;

  • Disbursement or receipt of any part of the consideration.
  • Any document’s recording,
  • Copying, typing or other clerical errands,
  • Acquiring title insurance reports, bills or reports that detail out about the maintenance of the property and,
  • Transmitting or transferring of documents between the seller and the buyer.

According to FIRPTA, a withholding agent or substitute will be liable to pay the full withholding tax that is required to be withheld inclusive of all the interests and penalties. A withholding person can be anyone who has the control, custody, receipts, payment of income or disposal of it that has been subjected to 10% withholding. In general, an agent is someone who pays the foreign person the withholding amount that has been subjected to FIRPTA withholding.

Key FAQs relating to Exceptions from FIRPTA Withholding

Who can apply for a withholding certificate and what is it?

Now that we are on the topic of exceptions from FIRPTA withholding, it is important that we know what a withholding certificate is and what purpose it serves. According to the FIRPTA laws, the amount of tax to be withheld should not, under any circumstances, exceed the tax liability of the seller or transferor. There are times when the maximum tax liability is less than the 10% required withholding. In such a case, the regulations set by the IRS offer a procedure in the form of a certificate called a withholding certificate to agree to an amount less than the set 10% withholding. This agreement between the transferor and the IRS can only be made if the transferor applies for a withholding certificate from IRS. The form 8288-B (withholding certificate) must be submitted to the IRS after being filled properly with all details required. Both the transferor and the transferee can apply for the withholding certificate.

Can a foreigner enjoy 15% exceptions from FIRPTA withholding on a short sale?

Even if the seller enjoys a short sale, there is no exception from FIRPTA Withholding. Although the seller can’t be exempt from the 15% withholding as per the real estate laws, he/she can apply for reduction in the withholding through a IRS form. He/she needs to obtain a withholding certificate that states that the amount of withholding has been reduced to zero before the closing takes place or if that can’t be obtained, a 15% of the withholding be held by the realtor or closing agent until the seller can obtain a permit or a withholding certificate to be directed to the IRS within a 20 day period before closing. However, one thing must be clear; the IRS has no obligation or permission to expedite the process or make any exceptions from FIRPTA withholdings in case of a short sale, but an attempt can be made to expedite the process if the seller is having any hardships and selling the property is purely out of need.

If you need assistance with a FIRPTA Withholding Certificate please call us 407-344-1012, or email us at info@freedomtaxfl.com

 

 

Robert AcevedoExceptions From FIRPTA Withholding

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