Several foreign investors regularly sell their real estate property in the United States. When buyers choose a real estate property sold by foreign investors, they have to pay taxes to the IRS (IRS) as a tax obligation under FIRPTA law. There was no such law previously and the transaction with foreign sellers was exactly like the one which took place between residential sellers. Due to this, taxes often went unpaid. As a result, in 1984, the Congress, under the PATH (Protecting Americans from Tax Hikes) Act, came up with FIRPTA law.
This is applied to everyone. Whether you are a corporation or an individual, you fall under FIRPTA law and have to pay taxes if you have purchased a real estate property from a foreign seller. For this reason, you need to fill a FIRPTA form provided by the IRS. This law does not apply to resident aliens because they have a green card provided to them by the Immigration and Nationalization Service (INS) and do not fall under FIRPTA law.
If you are also dealing with a foreign seller when buying or selling your real estate property and are not sure about FIRPTA law and the FIRPTA form, this blog will help you understand all there is to it.
If you need help with any FIRPTA form you can call us at 407-502-2400, or email us at [email protected].
Overview to FIRPTA
Before we go into the details of what a FIRPTA form consists of, let’s go over the background of what the FIRPTA law is. Enacted in 1980, FIRPTA stands for Foreign Investment Real Property Tax Act. The core aim of this law is to monitor the disposition of a United States real estate property that is held by the foreigner. Under FIRPTA law, the business of the foreign person pays taxes to the IRS on the sale of property. Under this law, buyers purchasing a property from foreigners need to pay a 15% tax on the sale price of the real estate property.
Since there were no laws made with regards to FIRPTA withholding, there was no FIRPTA form too and the IRS did not have any means to get taxes from the gain of sale by foreign sellers. With this law, FIRPTA charges a significant amount from the foreign investors in the United States. Those who do not wish pay these charges consider taking a FIRPTA form and withholding the money instead.
As this law can put many buyers at a significant loss, therefore, they look for solutions to cut down or become completely exempt from paying taxes. By using a FIRPTA form, you can be exempted from paying off a huge amount as tax on the sale of real estate. Helping you save up to 15% of your money, purchasing the rental property from the foreign seller will become a breeze. Though only 10% of the amount used to be withheld previously, after amendments, the percentage has been raised to 15%. This is why buyers have to pay 15% taxes on the sale price.
All You Need to Know About a FIRPTA Form
FIRPTA law is the withholding obligation for taxes under section 1445 which is normally imposed on the transferee or the buyer when they are interested in purchasing a property from a foreign person. Be it domestic corporations or foreign ones, fiduciary trusts, estates or qualified investment entities, everyone is liable to pay these taxes. To help alleviate the burden of taxes, the IRS have made a FIRPTA form for buyers or transferees (whoever is paying the taxes to the IRS) to transmit the amount withheld.
FIRPTA Form 8288 has been developed for you ease. Along with the FIRPTA form, they have given instructions for all those who are confused about filing the FIRPTA form or are filling one for the first time. Here are some FAQs about FIRPTA form 8288 that will help you and clear all questions you have in mind.
What is the Purpose of a FIRPTA Form?
Under Section 1445, the purpose of a FIRPTA form is to alleviate the tax obligation that is generally imposed either on the transferee or the buyer. When a buyer is interested in a US real estate property that is held by the foreign person, they have to pay off 15% of the sale price of the property as tax. Additionally, this law is applicable on each and every entity that is dealing and transacting with the foreign seller. However, this is only applicable on real estate properties and not for any other property.
This amount that is withheld by the IRS can be transmitted using FIRPTA form 8288. To help these trusts, estates, corporations and all types of entities save money, FIRPTA form 8288 and FIRPTA form 8288-A requires you to fill some information and submit it to the IRS. After evaluating, you will probably be able to cut down or completely transmit the withholding money.
Who is Supposed to File the FIRPTA Form 8288?
Now that you know the purpose behind a FIRPTA form, you may also need to know who is responsible to file FIRPTA form 8288. FIRPTA form 8288 can either be filed by a buyer, transferee of the US real estate property, fiduciary, qualified investment entity, or corporation to transmit the amount that is to be withheld by the IRS. According to the IRS, if there are cases where two or more people are joint transferees, they will be separately charged and will have to file 2 separate FIRPTA forms to transfer the amount to the IRS.
Where can FIRPTA Form 8288 be Filed?
If you want to transmit the amount withheld by the IRS, you need to know where you are supposed to file it. Complete FIRPTA form 8288 properly either by taking help of the attorney or by filling in the information yourself. Then, send FIRPTA form 8288 to the IRS. It is necessary to ensure about the correctness of information because the IRS evaluates and cross-checks everything. If they find any discrepancy, they will reject your FIRPTA form. So, ensure about the correctness of information beforehand. After filling the form, you can send it at Ogden Service Center, P.O. Box 409101, Ogden, UT 84409. Ensure to send all A and B copies with the FIRPTA form 8288 as well.
When Do You Need to File FIRPTA Form 8288?
A transferee is required to file Form 8288 when they want to transmit the tax amount by the IRS. Also, they need to file it on the 20th day after the date of transfer. Often, some people who do not fall under the exemptions of the IRS and do have to pay the taxes withheld, they may often ask for making installment payments. For this, they need not file the FIRPTA Form 8288 until the 20th day. You can ask the IRS to delay penalties, interest and installment payments after the 21st day after the date of transfer when the payment is made.
What Else Needs to be Attached with FIRPTA Form 8288-A?
FIRPTA Form 8288 comes with some other parts and copies too in form of 8288-A and 8288-B. You need to attach both copies of Form 8288-A and Form 8288-B. Both of these copies are for the IRS while the C copy is for you to keep and records. From the 2 copies submitted to the IRS, Copy B is given to the foreign seller. Ensure to attach al the copies with you FIRPTA form so that your application does not get rejected. Additionally, if you find difficulty in filling the FIRPTA form, you can take help from your local attorney.
What If You Do Not Have Foreign Seller’s TIN Number?
You need to fill multiple details and information in FIRPTA form 8288 out of which one of the main things you need to write provide is your tax ID number as well as the foreign seller’s. But if you do not know the tax ID number of the foreign seller you are going to purchase your real estate property from, you need not worry at all.
The IRS will send a letter to the transferor (foreign seller) asking the tax ID number for the FIRPTA form. If they would not have obtained it, the IRS will send it to them along with some instructions to how to get a Tax Identification Number (TIN). After the tax ID number is provided to the IRS, they will send the stamped and approved Copy B of FIRPTA Form 8288-A to the foreign seller.
What are the Penalties if You Fail to Apply?
When you do not want to pay the taxes and do not want your money to be withheld by the IRS, you have to file the FIRPTA form. Under Section 6651, if you fail to pay the taxes under the prescribed time period, you will be subject to a penalty of $10,000. It is an important tax obligation for you to file taxes but when you fail to do so because of failure of FIRPTA Form 8288, you have to suffer the consequences. This is why you must not delay filing the FIRPTA Form 8288 to the IRS or else you will have to end up paying penalties. The corporate officers responsible to pay the taxes will be given penalties under the Section 6672.
What are the Parties Involved in FIRPTA Form 8288?
There are certain parties that are involved in FIRPTA Form 8288 that you need to know about prior to filling the form. Once you understand about the parties, it will become easier for you to understand the complicated FIRPTA Form 8288.
This person is the one who disposes off a US real estate property interest by exchanges, gift, sale or any other disposition. According to Section 1445, any entity that is disregarded that cannot be considered as the transferor.
The transferee is the foreigner or domestic person who acquires the US real estate property by gift, exchange, purchase or any other transfer.
· Foreign Person
Foreign person is a non-resident individual or foreign corporation that does not have a valid election under section 897. Those treated under this section are considered as Domestic Corporation. Additionally, a foreign resident alien is not considered as a foreign person.
· Withholding Agent
This person is the transferee or buyer who acquires the United States real estate property interest form he foreign person.
· Qualified Substitute
This is the person who is responsible to close the transaction. They can either be a company or an attorney.
· US Real Property Interest
It is the real estate property that is located in the US Virgin Islands or in the United States. Real estate property of the United States does not include the following elements.
- When the qualified shareholder holds the REIT interest.
- When the corporation does not hold any United States real estate property interest.
- When interest is domestically controlled in an investment entity.
· Date of Transfer
This is the date when the consideration is supposed to be paid. Also, this can be the liability that is assumed by the transferee.
· Amount Realized
This is the amount of cash that is to be paid or will be paid. It can also be the fair market value of the real estate property that is to be transferred.
How to Avoid FIRPTA Withholding Using FIRPTA Form 8288?
As you know you need to have a FIRPTA form in order to avoid FIRPTA withholding. Also, you need to get these forms stamped and properly sealed by the IRS. Attach the FIRPTA Forms and also its copies along so that your application does not get rejected. You can easily avoid the FIRPTA withholding using FIRPTA Form 8288. Check out the procedure below.
- Firstly, you need to see whether or not FIRPTA applies on your transaction. You can also check it looking at the two main elements. See if you have any exceptions to FIRPTA withholding. Then also see if you are dealing with a foreign person for your real estate property. You can see their status checking their Tax ID number or their Identity.
- Secondly, you will need to have a tax ID number from the IRS. As you know there are three active types of tax ID number including Social Security Number (SSN), Individual Taxpayer Identification Number (ITIN), and Employer Identification Number (EIN). Depending upon which Tax ID number you would require, obtain that one from the IRS.
- In order to obtain the FIRPTA form, you need to apply for the withholding certificate. By filling the FIRPTA Form 8288-B to the IRS, you can get it. But you must ensure to include the full legal name, full street address, type of interest, taxpayer identification number (ITIN, SSN, or EIN), contact price, state of transfer, general description and location of the property and name, address and TIN number of the transferors and transferees too.
- You need to send the information to this address, Internal Revenue Service Center, P.O. Box 409101, Ogden, UT 84409.
- After submitting the FIRPTA form, now it is time to inform and notify the transferee of your property.
- After informing the transferee, you will likely get compensation. After that, you have to enter into a 1031 exchange agreement before closing the property sale. For this, you will have to hire a Qualified Intermediary such as 1031 Exchange experts. These people are specialized professionals that can handle even the complicated and complex issues.
- Once you are done filing the 1031 exchange agreement, you should not forget to report it.
Exceptions from FIRPTA Withholding
There are a set of requirements and limitations for foreign tax withholding. You will not need the FIRPTA form if you fall under the following limitations. Check out the exemptions below;
- If the property does not have a sale price of more than $300,000, you will not be lawfully liable to pay the taxes. Additionally, this would only apply to the individual transferee.
- The real estate property that is established on the security market or is to be regularly traded is not liable for taxes. So, if you are buying such real estate property, you will not have to fill FIRPTA form
- Also, there is another exception about the qualified substitute followed by a statement. When the transferor gives the certification that the possession is in the hands of a qualified substitute, your taxes will not be withheld.
- Additionally, when the IRS themselves send a withholding certificate declaring that the withholding will be excused.
- You will not be liable to pay taxes when the transferor realizes that the United States real estate property interest is of no value.
If you are buying real estate properties, you need to be wary about the tax consequences. Ensure not to get involved with a foreign seller in the first place but if you do, you can get the tax withholding transmitted using FIRPTA Form 8288 with the help of an attorney.
If you need help with any FIRPTA form you can call us at 407-502-2400, or email us at [email protected].