As they say, two things are inevitable in life; death and taxes. However, this axiom does not hold true for the Internal Revenue Service (IRS) because of the foreign sellers of the real estate property. Previously, when foreign sellers in the United States owed taxes on gains from the sale, the IRS was unable to collect the returns on taxes.
Due to this reason, the taxes went unpaid and uncollected. To sort this out, the Congress modified the laws of 1984. Since then, the buyers are now required to collect the tax by withholding funds from the sale. FIRPTA law requires buyers of a United States real estate property to hold 10% of the amount received from the foreign seller.
This law is applied to all foreigners, be it an individual or a corporation. However, the law does not consider resident aliens to be foreign persons. Resident aliens possess a green card provided by the Immigration and Nationalization Service (INS) which does not require them to fall under FIRPTA law. When foreign investors are getting prepared for making a settlement, one of the main concerns on every settlement is concerning the Foreign Investment Real Property Tax Act (FIRPTA).
If you need help with your FIRPTA form please call us at 407-344-1012, or email us at [email protected].
If you want to know about the basics and the ins and outs of FIRPTA, you should read this blog.
What is FIRPTA?
Before we go into the details of FIRPTA form is, you should first understand FIRPTA. It stands for Foreign Investment Real Property Tax Act. This law was enacted in 1980 and was implemented in 1984. The purpose of FIRPTA is the proper disposition of a United States real estate property interest by a foreign person under the Real Estate Property Tax Act of 1980. Trading business claims and deductions from the trade and business operations, FIRPTA serves the local tax issues.
If you are concerned about the FIRPTA form, you should know that before 1980, there was no law regarding the taxes. After the Congress enacted this law, the IRS got the right to tax on the gains. A FIRPTA form charges costs on foreign investors. Also, the buyer must ensure to withhold 10% of the purchase price. It goes against the will of some people who do not wish for that amount to be withheld. That withheld amount is then collected as tax revenue by the IRS.
This law has put many foreign investors into losses and this is why they seek solutions to avoid withholding of taxes. However, foreign investors who are worried about this matter need not worry because the FIRPTA form can save and secure them from paying off these taxes. With this form, you can reduce the withholding tax amount by 10% and save your money. With this FIRPTA form, you will not find real estate purchase to be expensive anymore.
It is really important for the foreign investors especially to understand FIRPTA. . Before understanding about the FIRPTA Form, you should first know the requirements of FIRPTA.
- As a foreign person, 10% of the sale price will be withheld by the Internal Revenue Service (IRS). This percentage of amount is withheld by the IRS as a tax obligation for sellers. Other states have different withholding requirements; so, if you are a foreign investor, consult your lawyer.
- US citizens, US Green Card holders or those who can prove to be the resident of the United States do not fall under FIRPTA withholding.
- If you purchase a house which is worth less than $300,000. You will not be liable to pay the taxes and FIRPTA laws will not apply on you.
- If you sell at a small loss or profit, fill a 1031 exchange, and sell an inherited property which you have currently, you will be able to reduce the withholding of taxes or completely eliminate it.
FIRPTA Form to Avoid FIRPTA Withholding
Since the FIRPTA laws have been modified for foreign investors, local investors in the United States, on the other hand, are required to withhold 15% of the taxes instead of 10%. Those who are worried about tax withholding and wish to avoid it are more concerned now. These investors need not worry and they just need to file withholding certificates or forms to save their money. However, foreign investors should keep in mind that these certificates, or FIRPTA forms, will not entirely eradicate the requirement. These FIRPTA forms will save you a certain percentage of the owed amount, which can lower the burden on the foreigners.
Purpose of FIRPTA Form
A withholding obligation on the buyer is generally imposed when a United States real estate property is acquired from a foreign investor. No matter if the buyers are corporations or an individual, the payment of the taxes is obligatory for everyone. To help corporations, individuals, estates and trusts save their money, they can use Form 8288 and Form 8288-A to cut down the tax withholding for dispositions by foreign persons in United States real estate property interests.
Filing a FIRPTA Form – When and Where?
A foreign investor is required to file Form 8288 to the IRS and transmit the tax withheld on the 20th day after the date of transfer. You should withhold the amount even if the application has been submitted to the IRS on the date of the transfer. However, you should not file the FIRPTA form until the 20th day, unless the IRS emails you the copy of the notice of denial or withholding certificate. You can file the FIRPTA Form 8288 with the amount withheld, along with the copies to Ogden Service Center P.O. Box 409191 Ogden, UT 84409.
Parties and Elements Involved in a Filing a FIRPTA Form
There are certain parties involved in filing the FIRPTA form but before you explore the application process, you need to know about the people who are involved in the process.
A transferee is the person or foreign investor who acquires the United States real estate property by gift, purchase, exchange or any other transfer.
The transferor is the foreign person that disposes off a United States real estate property by exchange, sale, gift or any other disposition for the purpose of withholding. According to section 1445, a disregarded entity cannot be the transferor. In general, a disregarded entity is the one which is disregarded as a separate entity from its owner under the Regulations section of FIRPTA.
· Qualified Substitute
A qualified substitute is the person who is responsible for closing the transaction. They can be any attorney or company.
· Withholding Substitute
This is the person who acquires a United States real estate property from a foreign person. Basically, they acquire the return from the transferee.
· Foreign Person
A non-resident alien or an individual who does not have a valid identity under section 897 to be treated as a resident of the United States is considered as foreign person. They can either be trusts, estates, partnership firms, a corporation or any other legal entity. However, a resident alien cannot be termed as a foreign person.
· US Real Property Interest
It consists of any property that is located in the United States or the US Virgin Islands. A real estate property in the United States does not include the following:
- If an interest is domestically controlled in an investment entity.
- If an interest in the Real Estate Investment Trust (REIT) is held by a qualified shareholder.
- If an interest in a corporation does not hold any United States real estate property interest.
· Amount Realized
This is the amount of cash that will be paid or is to be paid. Basically, it is the fair market value of the other property to be transferred.
· Date of Transfer
This is the date on which the liability is either assumed by the transferee or when the consideration is paid.
Avoiding FIRPTA Withholding – Obtain the FIRPTA Form
In order to avoid FIRPTA withholding, you need to obtain a FIRPTA Form first. You need to get these forms stamped and sealed properly and give it to the IRS. You are required to attach these forms with the tax return. Check out how you can obtain one.
· Step 1: See if it Applies or Not
The first step to reduce or eliminate FIRPTA withholding is to first see whether or not it applies on your transaction. You can check it out on the basis of the elements listed below:
- If you have any exceptions to FIRPTA withholding.
- If you are selling a United States property being a foreigner..
· Step # 2: Obtain a Tax ID Number
The second step to obtain a FIRPTA Form using Taxpayer Identification Number (Tax ID number) from the IRS. There are 3 types of Tax ID numbers; Individual Taxpayer Identification Number (ITIN), Social Security Number (SSN) and Employer Identification Number (EIN). Individuals who are employed will have to obtain ITINs and SSNs because they are provided with those numbers while the employers or the business owners will have to obtain EIN number.
· Step # 3: Application for Withholding Certificate
Next step is to obtain a withholding certificate. By filling Form 8288–B to the IRS, you can get the certificate. All you need to do is to sign and stamp it. The application process must cover the following details;
- It should have the full legal name
- It should also contain the full street address
- It should have either of the Taxpayer Identification Number (ITIN, SSN or EIN, whichever applies)
- You need to mention if the person is a transferor and the transferee
- You also have to state the type of interest
- You have to ensure about the contact price
- You need to mention the State of transfer
- You must also ensure about the location and general description
- You should also include full legal names, street addresses and TIN numbers of all other transferors and transferees
Send the application to the following address after ensuring everything is written properly.
Internal Revenue Service Center
P.O. Box 409101
Ogden, UT 84409
· Step # 4: Inform the Transferee
Now that you have submitted the FIRPTA Form, now it is time to inform your transferee about the property. They will surely grant you compensation once you give them the go ahead.
· Step # 5: 1031 Exchange Agreement
After informing the transferee you are required to enter into a 1031 exchange agreement before closing the sale. With a 1031 exchange agreement, you will either have no tax or limited tax due at the time of the exchange. For a smooth process, you should hire a qualified and professional intermediary. Such experts are credible and they are well versed, you can sit back and they can look into your matters.
· Step # 6: Complete the Qualified Intermediary
By buying new property through a qualified intermediary, you need to properly complete your Intermediary Exchange. For proper completion, you must ensure about the following elements;
- You have to make sure that the value of the replacement properties or property is either greater or equal to the property you sold.
- You also have to ensure that all the net proceeds from your sale are applicable to the purchase of the replacement property in your exchange.
· Step # 7: Do Not Forget to Report
Lastly, you must not forget reporting you sale and exchange to the IRS.
Exceptions for FIRPTA Withholding
There are a set of requirements that free every foreign buyer from the tax withholding process. If you meet any of the following limitations or exceptions, you will not have to fill a FIRPTA form. Check out the exceptions for FIRPTA withholding below.
· Amount Not More than $300,000
If you are the transferee and acquire the property as a residence which has a sale price of $300,000 or less, you will not be lawfully liable to pay the taxes. Also, this only applies to an individual transferee.
· Domestic Corporation
The property which is in the interest of a domestic corporation and is regularly traded on an established securities market is not liable to pay taxes on its real estate sales. However, this exception is limited to certain dispositions of substantial amounts of non-publicly traded interests.
If the corporation was not a United States Real Property Holding Corporation (USRPHC) during the 5 years or for a shorter time period, it is exempted under FIRPTA laws.
· Qualified Statement
When the transferor gives a certification to a qualified substitute followed by a statement that the certification is in the possession of the qualified substitute.
· Withholding Excuse
When the IRS sends a withholding certificate on their own to excuse the party of withholding the amount.
· Zero Amount
When the transferor realizes that the United States real estate property interest is zero, you will not be liable to pay the taxes.
· US State Possession
You will not be required to pay the taxes if the property is acquired by the United States or is in their possession. Also, it will be an exceptional case if it is a political subdivision or falls under the District of Columbia.
Privacy Concerns in FIRPTA
When it comes to filling the FIRPTA form, some sellers are really uncomfortable in giving their social security number or any other tax payer identification number to the buyers for the real estate transaction. While this is a legal requirement and you are required to give it, the IRS values your concerns and hence, has provided an alternative procedure in this regard. There is a non-disclosure agreement in which the buyer and their agent agree to keep the seller’s taxpayer identification number confidential.
Before following on with the agreement, you need to understand that FIRPTA Form 8288 and 8288-A are two of the most important forms that are required to include the taxpayer identification numbers. If the numbers are not provided, then that could mean that the buyer does not want to provide it due to concerns of confidentiality. In this case, the buyer needs to provide the number in person or else, they will not be able to receive the funds.
The purchasers need to be wary of the tax consequences FIRPTA creates. Foreign sellers and the real estate agents for foreign sellers need to be informed about the FIRPTA policies before listing the real estate property for the sale. It is wise for the foreign person to seek out legal counsel from a certified public accountant in this regard to ensure about FIRPTA regulations.
If you need help with your FIRPTA form please call us at 407-344-1012, or email us at [email protected].