Have you ever bought a property from a foreign seller? Well, then you would have some knowledge about FIRPTA certificate. When real estate properties are sold by foreign sellers in the United States, they have to pay taxes to the Internal Revenue Service. There are tax obligations for locals as well as foreign sellers, but the only difference is that the locals do not get taxes on the real property they sell, instead they are taxed on the regular income. On the other hand, the foreign sellers are taxed on the real property they sell to the buyers.

Back in 1980s, there was no such law like this. After the Protecting Americans from Tax Hikes (PATH) Act, IRS came up with FIRPTA Foreign Investment in Real Property Tax Act, and FIRPTA certificate was initiated. Everyone is liable to pay taxes to the Internal Revenue Service (IRS) if they fall under FIRPTA law. Those foreign sellers who find the transaction expensive and costly because of taxes, they can file for FIRPTA form or FIRPTA certificate. This form helps them in reducing or transmitting the amount if they fall under exemptions.

If you need help doing a FIRPTA Withholding Certificate please call us at 407-502-2400, or email us at [email protected].

What is FIRPTA Certificate?

Before we understand about FIRPTA certificate, let’s first understand about FIRPTA in general. It is basically a Foreign Investment in Property Tax Act (FIRPTA) that is the tax withheld by the Internal Revenue Service for the real estate property sold by the foreign seller. The core aim of this law is to take taxes from the foreigners on the gain on sale of US property. The FIRPTA certificate is basically a sort of agreement that determines the non-foreign status of an individual.

It clearly declares that the transferee of the United States property need not withhold taxes when the seller is not a foreigner. Also, non-foreign seller accepts and is ready is automatically exempted from paying taxes under the disposition amount or gain on sale. The FIRPTA certificate clearly states the full legal name, complete address, and tax ID number of the residential seller. Additionally, the seller signs the FIRPTA certificate, understanding the perjury and penalties. In addition to this, a non-foreign seller has to fill all correct and genuine information. Otherwise, they would be given severe punishments and penalties.

When there was no FIRPTA law, there was no naturally FIRPTA certificate. This is why Internal Revenue Service (IRS) had no means to get taxes from the disposition and gain on sale on the real estate properties sold by the foreigners. But more often than not, foreign investors in a US based real estate property do not want to pay these taxes. This is the main reason why they sign the FIRPTA certificate. To avoid withholding of taxes, they fill FIRPTA form 8288 or 1031 Exchange agreement.

Filling this agreement can help foreign sellers save the amount and increase their profit. But this profit and disposition amount can only be saved if they are exempted. According to the law, 15% of the taxes are withheld by the IRS. Previously, only 10% of taxes used to be withheld by the IRS. But now after 2016 amendments, the numbers have changed much to investors’ dismay.

Core Purpose of FIRPTA Certificate

The Foreign Investment in Property Tax Act certificate is solely made for one major reason to protect the non-foreign sellers from the taxes, in case they fall in a category eligible for exemption. The residential seller will be protected from paying the liability to the Internal Revenue Service. Foreign sellers get a 15% withholding on the sale price of the closing.

In case, the foreign seller does not withhold the taxes, the liability comes on the buyer to pay the taxes on the purchased real property. Otherwise both, or any one of them would have to face severe consequences including penalties and fines. When you come across a foreign seller for real estate property, ensure that they have fill the FIRPTA certificate as well and eligible for tax exemption FIRTPA laws. If they do not fill it, you or the foreign seller would have to pay the taxes.

If you need help doing a FIRPTA Withholding Certificate please call us at 407-502-2400, or email us at [email protected].

Situations When You Need to Fill the FIRPTA Certificate

Buying a real estate property in the United States can be a bit complicated as it comes with heavy paperwork and legal process. But most importantly, you need to see the status of the selling party. If they are a foreigner then any one of you has to pay the taxes. If they are not a foreigner, then you would have to ensure that they fill the FIRPTA certificate.

According to the Section 1445, the withholding is only required for foreign sellers. The following two people are required to file the taxes as per Section 1445.

  • If the transferor is a foreigner
  • If the transferee is acquiring US real estate property

Now that you have got to know when you are required to withhold taxes, here are certain situations where you would require your non-foreign seller to fill the FIRPTA certificate and they do not have to withhold taxes on selling property.

·       When the Transferor is Not a Foreign Person

The first thing you should keep in mind while purchasing the real estate property is to see the status of the seller. The transferor of the real property should be residential and not foreign. When they are local, they can declare and sign the FIRPTA certificate. A seller cannot sign a false agreement because the agreement is signed under the penalties of perjury and oath.

Often, foreign sellers pretend to be non-foreigners, proving false certificate. Ensure that they do not show false ones because this may lead to severe punishments to both of you. If you are not sure about their license or certification, ensure to get it checked by the local attorney. FIRPTA certificate is one of the best ways to determine the non-foreign status and save from paying taxes.

·       When the Transferor Has the Certification of Non-Foreign Status

According to Section 1445 (a) when the transferor shows their certification to the transferee and furnishes that they are not a foreign person, buyer does not need to withhold taxes.

Here are three things that should be furnished upon which taxes need not be withheld. If the certification declares that:

  • If it determines that the seller is not a foreign person
  • If it is stamped and signed under the penalties of perjury
  • If it clearly mentions the name of the seller, identifies the home address and provides the tax ID number

If the transferor has certification declaring these three items, they will not have to withhold taxes. Also, this is considered as the FIRPTA certificate. Additionally, it is not just for individuals but it can also be for any partnership, corporation, foreign estate, foreign trust, and even a qualified pension fund as per IRS Section 897. But you need to ensure the tax ID numbers in this regard.

If the individual is a non-foreign seller, they would have a Social Security Number (SSN) and if there is some corporation considering themselves as a non-foreign seller, they would have Employer Identification Number (EIN). If you are unsure about the tax ID numbers, you should contact your local attorney and get help from them. Do not compromise on these matters as they are serious and may lead to severe consequences.

·       When the Foreign Corporation is Domestic One in Real

In addition to the previous two elements, you also need not file the FIRPTA certificate when the foreign corporation is actually a domestic corporation. This can happen when the foreign corporation makes a valid election under Section 897 to be treated as a domestic corporation. In such a case, the IRS will provide proof to the corporation in form of certificate furnishing the non-foreign status. The domestic corporation does not require filing FIRPTA certificate.

·       When You Are Dealing With Disregarded Entities

According to Section 897, a disregarded entity is also not entitled to pay taxes on the US real estate property interest. The transferor of these entities is separate from their owners. This is why these entities may not require showing the non-foreign status and filling the FIRPTA certificate.

Basics and Parties Involved in the FIRPTA Certificate

If it is your first time to get involved in a FIRPTA certificate, then you need to understand the basic terms and parties involved in it. Understanding these would help you in understanding the FIRPTA certificate.

·       Transferor

The transferor is the person who is responsible to dispose off the real estate property. They can do it in ways such as gift, sale, exchanges or disposition. But those entities that are disregarded, they cannot be considered by the transferor. This is because they are disregarded entities and their owners are treated separately.

·       Transferee

This is the domestic person or a foreigner who pays money for the US real estate property by purchase, gift, exchanging or through any other transfer.

·       Foreign Person

This is the person who is the non-resident alien or foreign corporation. They are considered so because they do not have the valid election under Section 897. The ones who are treated under this Section are considered as Domestic Corporation. A foreign person is a generic term used for all types of entities, trusts, corporations and individuals.

·       Withholding Agent

The FIRPTA certificate also uses withholding agent in the agreement. This is the person who is a transferee. They are the one who are required to hold the taxes. According to IRS, the buyer is supposed to hold 15% of the payment on the sale price and that should be given to the IRS. This should only be done when the buyer is dealing with a foreign seller for the real estate property.

·       Qualified Substitute

These are the intermediaries and agents who are required to close the transaction. They can be both, either individuals or companies.

·       Amount Realized

This is the most important aspect used in the FIRPTA certificate; this is the amount or the sale price that is to be paid by the buyer of the property. It can also be equal to the fair market value of the property.

·       Date of Transfer

As the name implies, this is the date written in numbers on which the consideration or the amount of sale is to be paid. If the seller is a foreigner, the amount should be written deducting the 15% taxes. If they are local and taxes are not supposed to be paid, the original amount would be paid.

·       US Real Estate Property Interest

This is the property that is located in the United States and is required to be sold to the buyer from the seller. The US property does not hold if

  • The interest is domestically controlled by the entity
  • The corporation does not hold any United States real estate property interest
  • The qualified shareholder holds the REIT interest

·       Tax ID Number

Another main element that is present on the FIRPTA certificate is the tax ID number. There are three types of tax ID numbers namely Individual Taxpayer Identification Number (ITIN), Social Security Number (SSN), and Employer Identification Number (EIN). All three of them are provided to the individuals or corporations on the basis of their status.

If the seller is a foreigner, they would get ITIN number while the ones who are locals may either get an SSN number or EIN number. So, ensure to write the tax ID number in the FIRPTA certificate correctly that is provided by your transferor.

·       Full Legal Name and Address

Another main aspect in the FIRPTA certificate is the full legal name and complete address. These are two necessary details, which need to be crosschecked from the ID card. Ensure to write their complete name and address with US street address in it.

Exemptions of FIRPTA Withholding

FIRPTA certificate declares the non-foreign status of locals. Also, this is the certification that saves you from paying hefty amount of taxes. Other than FIRPTA certificate, there are certain exemptions of FIRPTA withholding that can also help you cut down or transmit the amount of taxes. Check them out below.

·       Non-Foreign Person

The first thing that you need to see while dealing with the transferor for your real estate property is the status of the seller. If they are a foreign person, then you have to withhold 15% of taxes on the sale price and provide it to the Internal Revenue Service as per law. Otherwise, both of you will be held liable and may be subjected to serious consequences. But if the transferor is not the foreign person, then they will be exempted from paying hefty amount of taxes. Additionally, as per IRS Section 1445 (a), taxes are only paid by the foreign sellers of real estate in the US.

·       Personal Residence

Under the IRS law Section 897, the buyer does not have to withhold taxes on the personal residence. This means when the property falls under the following three conditions, it is not supposed to be taxed.

  • When the real estate property costs less than $300,000
  • When the real estate property is acquired by the buyer will be further used for the primary residence purpose
  • When the buyer themselves elect to give up the withholding.

·       Reduced Rate of Withholding

After 1980, FIRPTA was held liable on the foreign sellers of real estate property. But according to the amendments of February 16, 2016, the real estate property can now be partially exempted instead of full exemption. Those who are looking for ways to partially exempt the amount can opt for reduced rate of withholding. In this kind of withholding, the buyer has to reside in the property for 50% number of days in 12 month time period. If they meet this requirement, they need not withhold entire amount, they can withhold half of it. In this way, you buyers can reduce the burden of foreign seller.

·       Withholding Certificate

This is the FIRPTA certificate that declares the non-foreign status of the individual seller. When the seller receives the withholding certificate directly from the Internal Revenue Service (IRS), this would make them eliminate or transmit the withholding requirement.

Final Thought

FIRPTA is a very essential element for buyers who are dealing with the foreign sellers for their real estate property. Withholding taxes on the sale price is a liability on them. If transferees do not withhold it, they would have to face penalties and fine for that along with the foreign sellers. But if you are dealing with a local seller for your real estate property ten you need to ensure about their FIRPTA certificate.

If you need help doing a FIRPTA Withholding Certificate please call us at 407-502-2400, or email us at [email protected].


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